-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IE9JAXk1xfDILDKGCDOlF4sCPq3lbqTJbhG84KkayAfJmkGIvcZHca6xXQhVVRmi nGHAx7R/qRRhLgbWI1sgLg== 0001017062-97-002162.txt : 19971208 0001017062-97-002162.hdr.sgml : 19971208 ACCESSION NUMBER: 0001017062-97-002162 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19971204 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFE FINANCIAL CORP CENTRAL INDEX KEY: 0001028918 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-41519 FILM NUMBER: 97732615 BUSINESS ADDRESS: STREET 1: 4115 TIGRIS WAY CITY: RIVERSIDE STATE: CA ZIP: 92503 BUSINESS PHONE: 9098869751 MAIL ADDRESS: STREET 1: 1598 EAST HIGHLAND AVENUE CITY: SAN BERNADINO STATE: CA ZIP: 92404 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFE FINANCIAL CAPITAL TRUST CENTRAL INDEX KEY: 0001050793 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-41519-01 FILM NUMBER: 97732616 BUSINESS ADDRESS: STREET 1: 10540 NORTH MAGNOLIA AVENUE UNIT B CITY: RIVERSIDE STATE: CA ZIP: 92505 BUSINESS PHONE: 9098869751 MAIL ADDRESS: STREET 1: 1598 EAST HIGHLAND AVENUE CITY: SAN BERNADINO STATE: CA ZIP: 92404 S-1 1 FORM S-1 ORIGINAL FILING AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 4, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- LIFE FINANCIAL CORPORATION LIFE FINANCIAL CAPITAL TRUST (EXACT NAME OF REGISTRANT AS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF SPECIFIED IN ITS CERTIFICATE OF INCORPORATION) INCORPORATION) DELAWARE DELAWARE (STATE OR OTHER JURISDICTION OF (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) INCORPORATION OR ORGANIZATION) 33-0743196 APPLIED FOR (IRS EMPLOYER IDENTIFICATION NO.) (IRS EMPLOYER IDENTIFICATION NO.) 6035 N/A (PRIMARY STANDARD INDUSTRIAL (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) CLASSIFICATION CODE NUMBER) 10540 NORTH MAGNOLIA AVENUE 10540 NORTH MAGNOLIA AVENUE UNIT B UNIT B RIVERSIDE, CALIFORNIA 92503 RIVERSIDE, CALIFORNIA 92503 (909) 637-4000 (909) 637-4000 (ADDRESS, INCLUDING ZIP CODE, AND (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) EXECUTIVE OFFICES) -------------- DANIEL L. PERL PRESIDENT AND CHIEF EXECUTIVE OFFICER LIFE FINANCIAL CORPORATION 10450 NORTH MAGNOLIA AVENUE, UNIT B RIVERSIDE, CALIFORNIA 92505 (909) 637-4000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JOSEPH G. PASSAIC, JR., ESQUIRE ROGER M. COHEN, ESQUIRE MARY M. SJOQUIST, ESQUIRE ETHAN D. FEFFER, ESQUIRE GEOFFREY W. RYAN, ESQUIRE NEEL GROVER, ESQUIRE MULDOON, MURPHY & FAUCETTE BROBECK PHLEGER & HARRISON LLP 5101 WISCONSIN AVENUE, N.W. 4675 MACARTHUR COURT, SUITE 1000 WASHINGTON, D.C. 20016 NEWPORT BEACH, CALIFORNIA 92660 (202) 362-0840 (714) 752-7535 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE - --------------------------------------------------------------------------------------- % Convertible Trust Preferred Securities of LIFE Financial Capital Trust.................. 1,150,000 Shares $25.00 $28,750,000 $8,482 - --------------------------------------------------------------------------------------- Junior Convertible Subordinated Debentures of LIFE Financial Corporation(1)......... -- -- -- -- - --------------------------------------------------------------------------------------- Common Stock, par value $0.01 per share, of LIFE Financial Corporation............ (2) -- -- -- - --------------------------------------------------------------------------------------- LIFE Financial Corporation Guarantee with respect to the Capital Securities(3).. -- -- -- -- - --------------------------------------------------------------------------------------- Total(4)............ 1,150,000 $25.00 $28,750,000(5) $8,482
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) The Junior Convertible Subordinated Debentures (the "Junior Subordinated Debentures") to be issued by LIFE Financial Corporation (the "Company") will be purchased by LIFE Financial Capital Trust (the "Trust") with the proceeds of the sale of the Convertible Trust Preferred Securities (the "Capital Securities"). No separate consideration will be received for the Junior Subordinated Debentures distributed upon any liquidation of the Trust. (2) Such indeterminate number of shares of common stock, par value $0.01 per share, of the Company (the "Common Stock") as may be issuable upon conversion of the Capital Securities registered hereunder. Shares of Common Stock issued upon conversion of the Capital Securities will be issued without the payment of additional consideration. This Registration Statement also covers such shares as may be issuable upon such conversion pursuant to anti-dilution adjustments. (3) No separate consideration will be received for the Company's Guarantee with respect to the Capital Securities (the "Guarantee"). (4) This Registration Statement is deemed to cover the Junior Subordinated Debentures, the rights of holders of Junior Subordinated Debentures under the Indenture, the rights of holders of Capital Securities under the Amended and Restated Declaration of Trust and the rights of holders of Capital Securities under the Guarantee, which together guarantee the obligations of the Trust with respect to the Capital Securities to the extent set forth in the Guaranty. (5) Such amount represents the aggregate liquidation amount of the Capital Securities to be issued hereunder and the principal amount of Junior Subordinated Debentures that may be distributed to holders of Capital Securities upon any liquidation of the Trust. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED IN THE OFFERING DESCRIBED IN THIS PROSPECTUS PRIOR + +TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS + +SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY + +NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH + +OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR + +QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER , 1997 CAPITAL SECURITIES LIFE FINANCIAL CAPITAL TRUST % CONVERTIBLE TRUST PREFERRED SECURITIES (LIQUIDATION AMOUNT $ . PER CAPITAL SECURITY) GUARANTEED, AS DESCRIBED HEREIN, BY [LOGO OF LIFE FINANCIAL CORPORATION] The % Convertible Trust Preferred Securities (the "Capital Securities") offered hereby represent preferred undivided beneficial interests in the assets of LIFE Financial Capital Trust, a statutory business trust created under the laws of the State of Delaware (the "Trust"). LIFE Financial Corporation (formerly known as Life Financial Corp.), a Delaware corporation (the "Company"), will be the owner of all the beneficial interests represented by the common securities of the Trust (the "Common Securities" and, together with the Capital Securities, the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in . % Junior Convertible Subordinated Debentures (the "Junior Subordinated Debentures") to be issued by the Company. The Junior Subordinated Debentures will mature on , 2027 (the "Stated Maturity Date"). The Capital Securities will have a preference over the Common Securities under certain circumstances with respect to cash distributions and amounts payable on liquidation, redemption or otherwise. See "Description of Capital Securities--Subordination of Common Securities." The Company has applied to have the Capital Securities approved for quotation on the National Market System of the Nasdaq Stock Market ("Nasdaq"), subject to official notice of issuance. ---------- FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT IN THE CAPITAL SECURITIES, SEE "RISK FACTORS RELATED TO THE CAPITAL SECURITIES" AND "RISK FACTORS RELATED TO THE COMPANY" BEGINNING ON PAGES 15 AND 20, RESPECTIVELY, OF THIS PROSPECTUS. ---------- THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS PROCEEDS TO THE PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Capital Security.... $ $ (3) $ - -------------------------------------------------------------------------------- Total(4)................ $ $ (3) $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) See "The Offering" for information concerning indemnification of the Underwriter and other matters. (2) Before deducting expenses of the Offering payable by the Company, estimated to be $ . (3) As the proceeds of the sale of the Capital Securities will be invested in the Junior Subordinated Debentures, the Company has agreed to pay the Underwriter a fee for its services in the Offering. For a discussion of the fees to be paid to the Underwriter, see "Underwriting." (4) The Trust and the Company have granted the Underwriter an option, exercisable for a period of 30 days from the date of this Prospectus, to purchase up to additional Capital Securities solely to cover over- allotments, if any. If the option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Trust will be $ , $ and $ , respectively. See "Underwriting." The Capital Securities offered hereby are offered subject to prior sale, when, as and if delivered to and accepted by the Underwriter, and subject to its right to withdraw, modify, correct and reject orders in whole or in part. It is expected that delivery of the Capital Securities will be made against payment therefor in immediately available funds at the offices of Keefe, Bruyette & Woods, Inc., (the "Underwriter"), Two World Trade Center, New York, New York, on or about December , 1997. KEEFE, BRUYETTE & WOODS, INC. THE DATE OF THIS PROSPECTUS IS DECEMBER , 1997 Each Capital Security is convertible in the manner described herein at the option of the holder thereof, at any time prior to the earlier of (i) 5:00 p.m. (Pacific time) on the Business Day (as defined herein) immediately preceding the date of repayment of such Capital Security, whether at maturity or upon redemption, and (ii) 5:00 p.m. (Pacific time) on the Conversion Termination Date (as defined herein), if any, into shares of the Company's common stock, par value $.01 per share (the "Common Stock") at a conversion rate of shares of Common Stock for each Capital Security (equivalent to a conversion price of $ per share of Common Stock), subject to adjustment in certain circumstances. See "Description of Capital Securities--Conversion Rights." The Common Stock is quoted on the Nasdaq under the symbol "LFCO." On December , 1997, the last reported sale price of the Common Stock was $ . per share. The Company has applied to have the Capital Securities approved for quotation on the Nasdaq, subject to official notice of issuance, under the symbol "LFCOP." See "Underwriting." The Capital Securities are being offered hereby in a public offering (the "Offering") by the Underwriter. See "Underwriting." Except as described herein, the Capital Securities to be issued in the Offering will be represented by global Capital Securities in fully registered form, deposited with a custodian for and registered in the name of a nominee of The Depository Trust Company ("DTC"). Beneficial interests in such Capital Securities will be shown on, and transfers thereof will be effected through, records maintained by DTC and its participants. All Capital Securities will be offered at the "Offering Price," equal to the liquidation amount of $ per Capital Security (the "Liquidation Amount"). See "Underwriting." Holders of the Capital Securities will be entitled to receive cumulative cash distributions, accumulating from the original date of issuance of the Capital Securities (the "Issue Date") and payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing March 15, 1998, at the annual rate of . % of the Liquidation Amount of $ . per Capital Security ("Distributions"). So long as no Debenture Event of Default (as defined herein) has occurred and is continuing, the Company will have the right to defer payments of interest on the Junior Subordinated Debentures at any time and from time to time for a period not exceeding 20 consecutive quarters with respect to each deferral period (each, an "Extension Period"), provided that no Extension Period may end on a day other than an Interest Payment Date (as defined herein) or extend beyond the Stated Maturity Date. Upon the termination of any such Extension Period and the payment of all amounts then due, the Company may elect to begin a new Extension Period, subject to the requirements set forth herein. If and for so long as interest payments on the Junior Subordinated Debentures are so deferred, Distributions on the Trust Securities also will be deferred and the Company will not be permitted, subject to certain exceptions described herein, to declare or pay any cash distributions with respect to the Company's capital stock or to make any payment with respect to debt securities of the Company that rank pari passu with or junior to the Junior Subordinated Debentures. During an Extension Period, interest on the Junior Subordinated Debentures will continue to accrue (and the amount of Distributions to which holders of the Trust Securities are entitled will continue to accumulate) at the rate of . % per annum, compounded quarterly (to the extent permitted by applicable law), and holders of Trust Securities will be required to accrue interest income for United States federal income tax purposes prior to receipt of cash payments attributable to such interest income. See "Description of Junior Convertible Subordinated Debentures--Option to Extend Interest Payment Date" and "Certain Federal Income Tax Considerations--Interest, Original Issue Discount, Premium and Market Discount." The Company will, through the Guarantee, the Common Guarantee, the Declaration, the Junior Subordinated Debentures and the Indenture (each as defined herein), taken together, fully, irrevocably and unconditionally guarantee on a subordinated basis all of the Trust's obligations under the Trust Securities. See "Relationship Among the Capital Securities, the Junior Subordinated Debentures and the Guarantee--Full and Unconditional Guarantee." The Guarantee and the Common Guarantee will guarantee payments of distributions and payments on liquidation or redemption of the Trust Securities, but in each case only to the extent that the Trust holds funds on hand legally available therefor and has failed to make such payments, as described herein. ii See "Description of the Guarantee." If the Company fails to make a required payment on the Junior Subordinated Debentures, the Trust will not have sufficient funds to make the related payments, including distributions, on the Trust Securities. The Guarantee and the Common Guarantee will not cover any such payment when the Trust does not have sufficient funds on hand legally available therefor. In such event, a holder of Capital Securities may institute a legal proceeding directly against the Company to enforce payment to such holder of accrued but unpaid interest on the Junior Subordinated Debentures with a principal amount equal to the Liquidation Amount of the Capital Securities held by such holder. See "Description of Junior Convertible Subordinated Debentures--Enforcement of Certain Rights by Holders of Capital Securities." The obligations of the Company under the Junior Subordinated Debentures, the Guarantee and the Common Guarantee will be unsecured and subordinate and rank junior in right of payment to all Senior Indebtedness (as defined herein) of the Company to the extent and in the manner set forth in the Indenture and the Guarantees. See "Description of Junior Convertible Subordinated Debentures--Subordination." The Trust Securities will be subject to mandatory redemption in a Like Amount (as defined herein), (i) in whole but not in part, on the Stated Maturity Date upon repayment of the Junior Subordinated Debentures at a redemption price equal to the principal amount of, plus accrued and unpaid interest on, the Junior Subordinated Debentures (the "Maturity Redemption Price"), (ii) in whole but not in part, at any time, contemporaneously with the optional prepayment of all of the Junior Subordinated Debentures, upon the occurrence and continuation of a Special Event (as defined herein), at a redemption price equal to the Special Event Prepayment Price (as defined herein) (the "Special Event Redemption Price"), and (iii) in whole or in part, on or after , (the "Initial Optional Prepayment Date"), contemporaneously with the optional prepayment by the Company of all or a part of the Junior Subordinated Debentures, at a redemption price equal to the Optional Prepayment Price (as defined herein) (the "Optional Redemption Price"). Any of the Maturity Redemption Price, the Special Event Redemption Price and the Optional Redemption Price may be referred to herein as the "Redemption Price." See "Description of Capital Securities--Redemption." The Junior Subordinated Debentures will be prepayable prior to the Stated Maturity Date at the option of the Company (i) on or after the Initial Optional Prepayment Date, in whole or in part, at a prepayment price (the "Optional Prepayment Price") equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of prepayment, or (ii) at any time, in whole but not in part, upon the occurrence and continuation of a Special Event, at a prepayment price (the "Special Event Prepayment Price") equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of prepayment. Either of the Optional Prepayment Price or the Special Event Prepayment Price may be referred to herein as the "Prepayment Price." See "Description of Junior Convertible Subordinated Debentures--Optional Prepayment" and "--Special Event Prepayment." In addition to the rights of the Company to redeem the Capital Securities under the circumstances described in this Prospectus, the Company also will have the right to terminate the convertibility of the Capital Securities into Common Stock as described in this paragraph. If for at least 20 trading days within any period of 30 consecutive trading days ending on or after , , including the last trading day of such period, the Closing Price (as defined herein) of the Common Stock exceeds % of the then applicable Conversion Price of the Capital Securities, the Company may, at its option, terminate the right to convert the Junior Subordinated Debentures into Common Stock, in which case the right to convert the Capital Securities into Common Stock will likewise terminate. To exercise this conversion termination option, the Company must cause the Trust to issue a press release announcing the date upon which conversion rights will expire (the "Conversion Termination Date"), prior to the opening of business on the second trading day after a period in which the condition in the preceding sentence has been met, but in no event may such press release be issued prior to , . Notice of termination of conversion rights will be given by first-class mail to the holders of the Capital Securities not more than four business days after the Trust issues the press release. The Conversion Termination Date shall be a Business Day not less than 30 and not more than 60 days following the date of the press release. See "Description of Capital Securities--Conversion Rights." iii The Company, as the holder of the outstanding Common Securities, will have the right at any time to dissolve the Trust and after satisfaction of or provision for liabilities to creditors of the Trust as required by applicable law, cause a Like Amount of the Junior Subordinated Debentures to be distributed to the holders of the Trust Securities in liquidation of the Trust, subject to the Company having received an opinion of counsel to the effect that such distribution will not be a taxable event to holders of the Capital Securities. No application has been made to have the Junior Subordinated Debentures approved for listing on the Nasdaq or on an exchange. However, under the terms of the Indenture, the Company must use its best efforts to have the Junior Subordinated Debentures listed on the Nasdaq or on an exchange at the time that they are distributed to the holders of the Trust Securities. See "Risk Factors Related to the Capital Securities--Absence of Public Market and Transfer Restrictions." Unless the Junior Subordinated Debentures are distributed to the holders of the Trust Securities, in the event of a liquidation of the Trust as described herein, after satisfaction of or provision for liabilities to creditors of the Trust as required by applicable law, the holders of the Capital Securities generally will be entitled to receive a Liquidation Amount of $ . per Capital Security plus accumulated and unpaid Distributions thereon to the date of payment. See "Description of Capital Securities--Liquidation of the Trust and Distribution of Junior Subordinated Debentures" and "Certain Federal Income Tax Considerations--Receipt of Junior Subordinated Debentures Upon Liquidation of the Trust" and "--Sale or Redemption of Capital Securities." As used herein, (i) the "Indenture" means the Indenture, to be dated on or prior to the Issue Date, as amended and supplemented from time to time, between the Company and State Street Bank and Trust Company ("State Street"), as trustee (the "Debenture Trustee"), relating to the Junior Subordinated Debentures, (ii) the "Declaration" means the Amended and Restated Declaration of Trust relating to the Trust, to be dated on or prior to the Issue Date, among the Company, as Sponsor, State Street, as Property Trustee (the "Property Trustee"), Delaware Trust Capital Management, Inc. ("Delaware Trust"), as Delaware Trustee (the "Delaware Trustee" and, collectively with the Property Trustee, the "Issuer Trustees"), the Administrators named therein (the "Administrators") and the holders from time to time of the Trust Securities, (iii) the "Guarantee" means the Guarantee Agreement relating to the Capital Securities, to be dated on or prior to the Issue Date, between the Company and State Street, as trustee (the "Guarantee Trustee") and (iv) the "Common Guarantee" means the Guarantee Agreement relating to the Common Securities by the Company, to be dated on or prior to the Issue Date. ---------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CAPITAL SECURITIES AND THE COMPANY'S COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." iv PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED ALL REFERENCES TO THE COMPANY SHALL BE DEEMED TO INCLUDE THE COMPANY AND ITS SUBSIDIARIES. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED OR IMPLIED IN THE FORWARD- LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS RELATED TO THE CAPITAL SECURITIES," "RISK FACTORS RELATED TO THE COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." FURTHER, CERTAIN FORWARD-LOOKING STATEMENTS ARE BASED UPON ASSUMPTIONS AS TO FUTURE EVENTS THAT MAY NOT PROVE TO BE ACCURATE. LIFE FINANCIAL CORPORATION The Company is a Delaware chartered savings and loan holding company headquartered in Riverside, California. The Company became the parent company of Life Bank (formerly Life Savings Bank, Federal Savings Bank) (the "Bank") pursuant to the holding company reorganization of the Bank (the "Reorganization") undertaken in connection with the Company's initial public offering of its Common Stock (the "IPO"). The Company completed the IPO on June 30, 1997. Together with shares issued subsequent to that date pursuant to the exercise of the underwriter's overallotment option, the Company issued a total of 3,335,000 shares of Common Stock in the IPO at a price of $11.00 per share. Net proceeds from the IPO amounted to $32.5 million. The Company originates, purchases, sell, securitizes and services primarily non-conventional mortgage loans principally secured by first and second mortgages on one- to four-family residences. The Company makes Liberator Series loans, which are for the purchase or refinance of residential real property by borrowers who generally would not qualify for Fannie Mae ("FNMA") or Freddie Mac ("FHLMC") loans ("sub-prime borrowers"), and Portfolio Series loans, which are debt consolidation loans for borrowers whose credit history qualifies them for FNMA and FHLMC loans ("Agency-Qualified Borrowers") with loan-to-value ratios of up to 135%. The Company has recently increased the permitted loan-to- value ratio on Portfolio Series loans to 135% from 125%. While the Company is currently emphasizing the origination of Portfolio Series loans, it intends to market both products as demand permits. Liberator Series and Portfolio Series loans are the Company's "core products." In addition, to a much lesser extent, the Company originates multi-family residential and commercial loans. The Company conducts its business from six locations: the Company's corporate headquarters and Western regional lending center in Riverside, California, two additional regional lending centers, one in Jacksonville, Florida and one in the Denver, Colorado metropolitan area, the national servicing center located in Riverside, California, and two bank branch offices in San Bernardino and Riverside, California. In addition, the Company has recently opened two low cost retail lending offices, and has entered into leases for an additional four retail lending offices to be opened by the end of 1997. In addition, the Company intends to open two retail lending offices in the first quarter of 1998. With the exception of one planned office expected to be opened in Northern California, the Company's two current and five of the six planned retail lending offices will be located in Southern California. See "Recent Developments." At September 30, 1997, the Company had total assets of $294.1 million, total deposits of $159.8 million and stockholders' equity of $49.5 million. During the nine months ended September 30, 1997, the Company originated or purchased, through a network of approved correspondents and independent mortgage brokers (the "Originators"), $433.4 million of non-conventional mortgage products, and sold or securitized $277.1 million 1 of such products. The Bank's deposits are insured up to the maximum allowable amount by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Company's headquarters are located at 10540 Magnolia Avenue, Suite B, Riverside, California 92505, and its telephone number at that location is (909) 637-4000. During the early 1990's, as a result of reduced employment levels and corporate relocations in Southern California and the general weakness of the national economy, the Company's market area experienced a weakening of real estate values and a reduction in home sales and construction. When confronted with increased competition and nominal growth during this same period, the Company's results of operations were adversely impacted and the Company began to experience increases in total non-performing loans held for investment. In response, in 1994, the Company retained new management experienced in sub-prime lending to redirect its business focus, revise its underwriting policies and procedures and enhance its related servicing capabilities. A plan was developed pursuant to which the Company reorganized its lending operations from that of a thrift emphasizing traditional mortgage banking and portfolio lending to that of a diversified financial services operation focusing on the origination for sale or securitization, with servicing retained, of various loan products to include Liberator Series loans, Portfolio Series loans, and, to a much lesser extent, commercial and multi-family real estate loans. The Company also adopted revised underwriting policies and instituted more aggressive procedures for resolving problem loans and for reducing the level of non-performing assets. As a result of these steps, the Company improved its profitability. As part of the Company's strategic plan, the Company developed an internal structure of operating divisions within the Bank, each with distinct objectives and management focus. The five divisions include (i) the Financial Services Division which emphasizes the wholesale origination of the Company's core products; (ii) the Income Capital Services Division which originates and sells commercial and multi-family mortgage loans; (iii) the Retail Loan Division which concentrates on offering loan products directly to the public primarily in the Bank's primary market area; (iv) the Asset Management Division which services loans and REO for both the Company and for Loan Purchasers; and (v) the Banking Division which offers depository services to the public. In 1994, the Company began to implement its plan which resulted in: . An increase in total purchases and originations of loans by 171.5% from $82.0 million for the year ended December 31, 1993 to $222.6 million for the year ended December 31, 1996. For the nine month period ended September 30, 1997, loans originated and purchased totalled $433.4 million. . An increase in loan sales and securitizations by 191.0% from $71.0 million for the year ended December 31, 1993 to $206.6 million for the year ended December 31, 1996. For the nine month period ended September 30, 1997, loan sales and securitizations totalled $277.1 million. . An increase in net income of 1,518.3% from $93,000 for the year ended December 31, 1993, to $1.5 million for the year ended December 31, 1996. For the nine month period ended September 30, 1997, net income was $7.7 million. . An increase in net gains from mortgage financing operations by 663.6% from $1.1 million for the year ended December 31, 1993, to $8.4 million for the year ended December 31, 1996. For the nine month period ended September 30, 1997, net gains from mortgage financing operations totalled $17.4 million. . An increase in deposits from $72.0 million at December 31, 1993 to $85.7 million at December 31, 1996. Deposits increased further to $159.8 million at September 30, 1997. The Bank also obtained warehouse lines of credit with two national investment banking firms aggregating $250.0 million, of which $54.6 million has been drawn upon at September 30, 1997. In addition, the Company obtained a line of credit in the amount of $40.0 million secured by residual assets created by the Company's securitization activities. See "Recent Developments." . An increase in stockholders' equity from $4.4 million at December 31, 1993 to $9.3 million at December 31, 1996, due to an increase in retained earnings and to the proceeds from the issuance of 2 Bank common stock in a private placement during 1996 totaling $3.5 million. Stockholders' equity increased further to $49.5 million at September 30, 1997, due to an increase in retained earnings and to the net proceeds from the issuance of Common Stock in the IPO totaling $32.5 million during 1997. The Bank also issued $10.0 million of subordinated debentures (the "Debentures") during 1997 to increase its risk based capital. COMPETITIVE STRENGTHS Management believes that it enjoys a competitive advantage when compared to most other finance companies competing in its product areas as a result of the following factors: Expertise of Management. The change in direction of the Company's business focus commenced with the hiring in 1994 of Daniel L. Perl, currently the Company's and the Bank's President and Chief Executive Officer. Mr. Perl has more than twenty years of experience in the financial services industry, including the areas of sub-prime lending, commercial real estate lending, mortgage banking and investment banking. Additional management expertise includes: . Mr. Bruce Mills has more than 15 years in banking and regulatory experience including service at the Federal Home Loan Bank, the predecessor of the OTS and ten years as chief financial officer of the Bank. . Ms. Mary Darter has more than 13 years of lending experience including sub-prime, bulk acquisition and warehouse lending. She joined the Bank in March of 1994 having previously worked with Mr. Perl from 1988 to 1991. . Mr. Joseph R. L. Passerino has been in the financial services industry for more than 20 years. His areas of expertise have included conventional and sub-prime residential loans as well as commercial lending. Mr. Passerino previously worked with Mr. Perl from 1985 to 1988. . Mr. Stephen Sandoval has more than 24 years of extensive experience in the servicing and collection of mortgage and consumer loans with a primary focus on loss mitigation including workout alternatives, bankruptcy and foreclosure processing in addition to traditional day to day loan servicing functions. . Mr. Robert K. Riley joined the Company's Board of Directors after the IPO. Mr. Riley is the co-founder and Chief Executive Officer of Millenium Asset Management, L.L.C., a registered investment advisory firm. From 1992 to 1996, Mr. Riley worked for the Millenium Group, a consulting firm focused on designing asset securitization systems and developing risk management programs for European banks. The Board has implemented competitive management incentives to attract and retain qualified executives. See "The Board of Directors and Management of the Bank--Benefits--Cash Bonus Plan" and "--Stock Option Plans." Efficiency of Operations. Management believes that the efficiency of its operations allows the Company to offer to its Originators very competitively priced products. Management believes that this competitive pricing will increase the volume of loans originated. The efficiency of the Company's operations results from: . Providing Originators with clear, concise and consistent underwriting standards; . Well defined core products; . Low cost, strategically located loan facilities; . Rapid turnaround time on loan applications; . Limited number of strong and productive relationships with Originators; and . Originations of loans at low premiums or at a discount from par. Internal Controls. Management believes that the significant internal controls that have been established help preserve and assure the overall quality of loans originated by the Company. These internal controls include: . Dual signatures on all loan originations; 3 . Unanimous approval by two persons, including a member of senior management, of any exceptions to the Company's underwriting policies; . Exceptions to the Company's underwriting policies are kept to a minimum; . A limited number of appraisers approved by the Company's senior management perform or review appraisals on all loans originated or purchased by the Company; . For all loans on first payment default or 60 days overdue, a quality control review is completed by the quality control department; . Internal quality-control underwriting review of not less than 10.0% of all Liberator Series loans and 5.0% of all Portfolio Series loans originated, post-funding; and . Regularly-scheduled underwriting and delinquency meetings are held to review and update procedures and controls. Flexible Funding Sources and Structure. The Company has multiple sources of liquidity. As a federally-chartered savings bank, the Bank has additional funding avenues at a lower cost than its non-regulated finance company competitors. This advantage is derived from the Bank's ability to: . Access a long-term stable unsecured funding base through the Bank's deposits which are insured by the FDIC; . Increase its deposit base through competitive pricing and possible branch acquisitions or acquisitions of other depository institutions; and . Access funding through the Federal Home Loan Bank of San Francisco ("FHLB"). In addition, both the Bank and the Company have access to lines of credit from major financial institutions. The Bank has two warehouse lines of credit available in the aggregate amount of $250.0 million to fund loan originations, of which $54.6 million has been drawn upon at September 30, 1997, and is in the process of negotiating a third warehouse line of credit in the amount of $250.0 million. The Company has a line of credit in the amount of $40.0 million secured by residual assets created by the Company's securitizations. See "-- Recent Developments." Diversification Opportunities. The Company is a unitary savings and loan holding company which generally is not restricted in the types of business activities which it may conduct provided that the Bank continues to be a qualified thrift lender ("QTL"). See "Regulation--Federal Savings Institution Regulation--QTL Test." The Reorganization provided the Company with: . The opportunity to expand its current product line and enter into possible new product areas; . Broader investment opportunities than the Bank; and . Alternative access, if necessary, to the capital markets. GROWTH AND OPERATING STRATEGIES Management believes that, as a result of its competitive strengths, the Bank and the Company will be able to implement the following growth and operating strategies: . Expanding Core Products Through a National Originator Network. The Company will continue to emphasize and to expand the origination of its core products, Liberator Series loans and Portfolio Series loans, for sale through securitizations and in the secondary market. Continued growth in the origination of core products will result primarily from geographic expansion and greater penetration in existing markets. In particular, since the beginning of 1997, the Company has widely advertised its no income, no asset ("NINA") loan product, which is a limited documentation, lower loan-to-value loan program within the Liberator Series. NINA loans constituted $29.2 million of the $152.9 million of Liberator Series loans 4 originated during the nine months ended September 30, 1997. In order to improve its ability to service its expanding network of Originators, the Company has established strategically located, low cost regional lending centers in Riverside, California, Jacksonville, Florida and in the Denver, Colorado metropolitan area. The Company intends to open three additional regional lending centers to better serve its Originators over the next nine months. These regional lending centers are likely to be strategically located in Northern California and in the Northeast and Midwest sectors of the United States. . Expanding Retail Lending Production. The Company's retail lending operations currently focuses on retail loans located in the Company's primary market area of Southern California. The retail lending offices will focus on the origination of Liberator Series and Portfolio Series loans. In addition, the retail lending offices will originate non-core product loans to Agency-Qualified Borrowers. Non-core product loans originated by the retail lending offices will be sold to Loan Purchasers. The Company intends to gradually and selectively expand its retail lending operations. As part of this process, the Company has opened two low cost retail offices and has entered into leases for an additional four retail offices to be opened by the end of 1997. In addition, the Company intends to open two retail lending offices in January of 1998. With the exception of one planned office expected to be opened in Northern California, the Company's two existing and five of the six planned retail lending offices will be located in Southern California. In addition, the Company intends to further expand by opening additional retail offices outside of Southern California. The Company believes that expanding its retail lending operations will reduce the possibility that its borrowers will refinance their loans with other lenders. . Expanding Multi-Family and Commercial Lending. In continuing with its tradition as a niche market lender and in an effort to diversify product offerings, the Company has begun to focus its efforts on the origination and purchase of multi-family and commercial real estate loans in the range of $50,000 to $1.5 million both in its primary market area and throughout the United States through a selected group of originators. The Company is currently purchasing such loans at a discount and, although there can be no assurances, expects to be able to continue to purchase such loans at a discount or low premium. The Company employs underwriters who specialize in commercial and multi-family real estate lending and utilizes a select group of appraisers experienced in these products. In addition, two members of senior management have considerable expertise in multi-family and commercial real estate lending. The Company was primarily limited in its ability to originate multi-family and commercial real estate loans by its level of available capital. The Company is gradually expanding such originations as its available capital has increased. For the nine months ended September 30, 1997, the Company originated $25.1 million of multi-family and commercial loans, as compared to $7.1 million for the nine months ended September 30, 1996. The Company believes that it has the infrastructure in place to accommodate this expansion. All multi-family and commercial real estate loans are originated for sale in the secondary market and are currently being sold as whole loans. In the future, they may also be sold through securitizations. . Consistently Refining Operating Procedures. The Company intends to maintain loan quality by continuing to refine its underwriting criteria. Regularly-scheduled meetings of the Company's underwriting personnel are held in part to discuss operational issues as well as refinements to the Company's underwriting policies. In addition, the Company conducts regular loan delinquency meetings to discuss problem areas in the Company's servicing portfolio in order to reduce the likelihood of the recurrence of such problems in future loans. As necessary, the Company adds personnel to its loan processing staff and continues to utilize advancements in computer technology to provide prompt turnaround on loans, efficient underwriting procedures and accurate credit verification. In addition, the Company has a quality control department that is dedicated to maintaining quality control, reviews loan files to assure that each complies with the Company's underwriting policies, reviews all loans upon first payment default and loans sixty days delinquent, provides feedback and training to the underwriters to minimize future defaults and delinquencies, and investigates all fraudulent loans. 5 . Enhancing Servicing Capabilities. As the Bank has transitioned from a traditional thrift to a diversified financial services operation, it has expanded its servicing department from a total of four persons at December 31, 1994 to 20 persons at September 30, 1997. The head of the servicing department has 24 years of experience in loan servicing and collections including responsibility for a $10.0 billion portfolio of approximately 255,000 loans and a staff of 70 people. In anticipation of its future servicing needs, the Company has dedicated substantial space in its current Riverside facility to house loan servicing operations. The Company is in the process of implementing a power dialing system in its servicing facility and intends to implement computer imaging in the future. . Diversifying Funding Sources. In addition to its traditional thrift funding sources of deposits and loans from the FHLB, the Company has diversified its funding sources in recent periods. During the nine months ended September 30, 1997, net cash received from the Company's securitizations and sales provided a significant source of funding to the Company, aggregating $277.6 million for that period. The Bank has two warehouse lines of credit available in the aggregate amount of $250.0 million to fund loan originations, of which $54.6 million has been drawn upon at September 30, 1997, and is in the process of negotiating a third warehouse line of credit in the amount of $250.0 million. The Company has a line of credit in the amount of $40.0 million secured by residual assets created by the Company's securitizations. CORPORATE STRUCTURE The Company and the Bank consummated the Reorganization in June of 1997 whereby the Bank became a wholly-owned subsidiary of the Company. Management believes that the holding company form of organization provides the Company with more flexibility and a greater ability to compete with other financial services companies in the market place. In addition, due to regulatory capital limitations, the Bank is limited in the amount of investments in residuals and restricted cash resulting from securitizations that it can retain. The Company is not subject to such limitations, and thus will reduce the restrictions on the Bank's regulatory capital by acquiring and holding the residuals upon completion of a securitization. RECENT DEVELOPMENTS Recent Loan Origination Volume. The Company originated and purchased approximately $132.0 million in mortgage loans during the two months ended November 30, 1997, exclusive of loans acquired in a bulk purchase discussed below, see "--Bulk Purchases," as compared to $194.4 million of mortgage loans originated and purchased during the three months ended September 30, 1997. Of the loans originated during this period, $34.2 million were Liberator Series (full documentation) loans, $12.9 million were Liberator Series (NINA) loans, $75.9 million were Portfolio Series loans and $9.0 million were multi-family and commercial real estate loans. Bulk Purchases. During the two months ended November 30, 1997, the Company purchased $91.1 million of loans in a bulk purchase. The loans are high loan- to-value ratio loans similar in terms to the Company's Portfolio Series loans. These loans were originated by approximately 100 correspondents of the seller. The Company had previously purchased loans from approximately 30 of such entities and consequently the Company had reviewed their underwriting guidelines, in the manner specified under "Business--Core Lending Products-- Underwriting." With respect to the approximately 70 other entities, the Company performed a limited review of their underwriting guidelines. The Company reviewed a significant sample of the acquired loans, with an emphasis on loans originated by those entities with whom the Company had no prior relationship, to determine, among other things, whether they complied with the Company's underwriting standards, and, based on such review, the Company believes that the acquired loans conform in all material respects with the Company's underwriting guidelines. The purchase is subject to standard loan repurchase or substitution obligations on the part of the seller, and the Company additionally has the right to enforce such repurchase or substitution obligations against the initial originators of the loans. The Company intends to include the $91.1 million of bulk purchase loans in the securitization discussed below. 6 Recent Securitization Activities. The Company is in the process of issuing $250.0 million in home loan asset-backed notes through a securitization. The notes will be backed by Portfolio Series loans. The initial funding will be approximately $190.0 million. The Company expects to complete this securitization by December 31, 1997. Lines of Credit. As a means of increasing its access to borrowed funds, the Bank is currently in the process of negotiating an additional $250.0 million warehouse line of credit with a national investment banking firm. The warehouse line of credit is expected to be secured by loans originated and purchased by the Company. The Company has recently entered into a $40.0 million line of credit with a national investment banking firm secured by residuals generated by the Company's securitization activities. Management anticipates that such lines of credit will provide the Company with the ability to increase its loan production activities, as well as providing the Company with the ability to borrow against the residuals; however, one of the lines of credit is still being negotiated, and there can be no assurances that a definitive agreement will be reached, or if an agreement is reached, that it will conform to the terms outlined above. Low Cost Retail Offices. As part of the Company's efforts to expand its retail lending operations, the Company recently opened two low cost retail lending offices, and has entered into leases for an additional four retail lending offices to be opened by the end of 1997. In addition, the Company intends to open two retail lending offices in the first quarter of 1998. With the exception of one planned office expected to be opened in Northern California, the Company's two current and five of the six planned retail lending offices will be located in Southern California. LIFE FINANCIAL CAPITAL TRUST The Trust is a statutory business trust created under Delaware law pursuant to (i) a declaration of trust, executed by the Company, as Sponsor, State Street, as Property Trustee, Delaware Trust Capital Management (Delaware), as Delaware Trustee and an executive officer of the Company, as Initial Trustee, and (ii) the filing of a certificate of trust with the Delaware Secretary of State on December 2, 1997. The Trust's affairs will be conducted by the Property Trustee and the Delaware Trustee, and by the Administrators who are employees or officers of or affiliated with the Company. The Trust exists for the exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using the proceeds from the sale of the Trust Securities to acquire the Junior Subordinated Debentures, and (iii) engaging in only those other activities necessary, advisable or incidental thereto (such as registering the transfer of the Capital Securities). Accordingly, the Junior Subordinated Debentures will be the sole assets of the Trust, and payments under the Junior Subordinated Debentures will be the sole revenue of the Trust. All of the Common Securities will be owned by the Company. THE CAPITAL SECURITIES Securities Offered............. Up to % Capital Securities (Liquidation Amount $ per Capital Security), which rep- resent preferred undivided beneficial inter- ests in the assets of the Trust. The Junior Subordinated Debentures held by the Trust will mature on , 2027. All Capital Securities are being offered hereby to the public in the Offering by the Underwriter. Offering Price................. $ per Capital Security. Distribution Dates............. March 15, June 15, September 15 and December 15 of each year, commencing March 15, 1998. Extension Periods.............. So long as no Debenture Event of Default has occurred and is continuing, Distributions on Capital Securities may be deferred 7 for the duration of any Extension Period elected by theCompany with respect to the pay- ment of interest on the Junior Subordinated Debentures. No Extension Period will exceed 20 consecutive quarters or extend beyond the Stated Maturity Date. See "Description of Ju- nior Convertible Subordinated Debentures--Op- tion to Extend Interest Payment Date" and "Certain Federal Income Tax Considerations-- Interest, Original Issue Discount, Premium and Market Discount." Ranking........................ The Capital Securities will rank pari passu, and payments thereon will be made pro rata, with the Common Securities except as described under "Description of Capital Securities--Sub- ordination of Common Securities." The Junior Subordinated Debentures will rank pari passu with all other junior subordinated debentures issued by the Company ("Other Debentures"), which will be issued and sold (if at all) to other trusts established by the Company (if any), in each case similar to the Trust ("Other Trusts"), and will be unsecured and subordinate and rank junior in right of pay- ment to all Senior Indebtedness of the Company to the extent and in the manner set forth in the Indenture. See "Description of Junior Con- vertible Subordinated Debentures." There are currently no other securities that would con- stitute Other Debentures. The Guarantee will constitute an unsecured obligation of the Com- pany and will be subordinate and rank junior in right of payment to all Senior Indebtedness of the Company to the extent and in the manner set forth in the Guarantee Agreement. In addi- tion, because the Company is a holding compa- ny, the Company's obligations under the Junior Subordinated Debentures and the Guarantee ef- fectively will be subordinated to all existing and future liabilities, including indebted- ness, of the Company's subsidiaries, including the Bank's deposit liabilities. See "Descrip- tion of the Guarantee" and "Risk Factors Re- lated to the Capital Securities--Ranking of Subordinate Obligations Under the Guarantee and Junior Subordinated Debentures." Conversion into Common Stock... Each Capital Security is convertible at the option of the holder thereof, at any time prior to the earlier of (i) 5:00 p.m. Pacific time) on the Business Day immediately preced- ing the date of repayment of such Capital Se- curity, whether at maturity or upon redemp- tion, and (ii) 5:00 p.m. (Pacific time) on the Conversion Termination Date (if any) into shares of Common Stock at a conversion rate of shares of Common Stock of the Company for each Capital Security (equivalent to a conver- sion price of $ per share of Common Stock) (the "Conversion Price"). On December , 1997, the last reported sales price of the Common Stock on the Nasdaq was $ per share. In connection with any conversion of a Capital Security, the Conversion Agent (as defined herein) will exchange such Capital Security for the appropriate principal amount of Junior 8 Subordinated Debentures held by the Trust and immediately convert such Junior Subordinated Debentures into shares of Common Stock. No fractional shares of Common Stock will be is- sued as a result of conversion, but in lieu thereof such fractional interest will be paid by the Company in cash. See""Description of Capital Securities--Conversion Rights." Hold- ers of Capital Securities at 5:00 p.m. (Pa- cific time) on a Distribution Record Date (as defined herein) will be entitled toreceive the Distribution payable upon such Capital Securi- ties on the corresponding Distribution Date notwithstanding the conversion of such Capital Securities following such Distribution Record Date but on or prior to such Distribution Date. Termination of Conversion Rights........................ In addition to the rights of the Company to redeem the Capital Securities under the cir- cumstances described in this Prospectus, the Company also will have the right to terminate the convertibility of the Capital Securities into Common Stock as described in this para- graph. If for at least 20 trading days within any period of 30 consecutive trading days end- ing on or after , , including the last trading day of such period, the Closing Price of the Common Stock exceeds % of the then ap- plicable Conversion Price of the Capital Secu- rities, the Company may, at its option, termi- nate the right to convert the Junior Subordi- nated Debentures into Common Stock, in which case the right to convert the Capital Securi- ties into Common Stock will likewise termi- nate. To exercise this conversion termination option, the Company must cause the Trust to issue a press release announcing the Conver- sion Termination Date, prior to the opening of business on the second trading day after a pe- riod in which the condition in the preceding sentence has been met, but in no event may such press release be issued prior to , . Notice of termination of conversion rights will be given by first-class mail to the hold- ers of the Capital Securities not more than four Business Days after the Trust issues the press release. The Conversion Termination Date shall be a Business Day not less than 30 and not more than 60 days following the date of the press release described above. See "De- scription of Capital Securities--Conversion Rights." Redemption..................... The Trust Securities will be subject to manda- tory redemption in a Like Amount, (i) in whole but not in part, on the Stated Maturity Date upon repayment of the Junior Subordinated Debentures, (ii) in whole but not in part, at any time, contemporaneously with the optional prepayment of all of the Junior Subordinated Debentures by the Company upon the occurrence and continuation of a Special Event and (iii) in whole or in part, on or af- ter the Initial Optional Prepayment Date, con- temporaneously with the optional prepayment by the Company of all or a part of the Junior Subordinated Debentures, in each case at the applicable Redemption Price. See "Description of CapitalSecurities--Redemption." 9 ERISA Considerations........... Prospective purchasers should consider the re- strictions on purchase set forth under "ERISA Considerations." Absence of Market for the Capital Securities............ The Capital Securities will be a new issue of securities for which there currently is no market. Although the Company has applied to have the Capital Securities approved for quo- tation on the Nasdaq, there can be no assur- ance that such application will be approved, that an active trading market for the Capital Securities will develop or, if one does develop, that it will be maintained. Accord- ingly, there can be no assurance as to the de- velopment or liquidity of any market for the Capital Securities. USE OF PROCEEDS All of the proceeds to the Trust from the sale of the Trust Securities will be invested by the Trust in the Junior Subordinated Debentures. The net proceeds from the sale of the Junior Subordinated Debentures will be available to the Company for general corporate purposes, which may include, but not be limited to, the refinancing or prepayment of existing debt obligations, which may be of shorter maturity or higher coupon rate; the downstreaming of capital to the Bank, and the financing of future residuals resulting from securitizations; the acquisition of loan portfolios from other depository institutions or finance companies; and possible acquisitions of depository institutions or branches of depository institutions. The Company has not entered into any arrangement, agreement or understanding with respect to future acquisitions and there can be no assurances that it will do so in the future. No determination has been made as to the amount of proceeds, if any, that will be allocated to any of the above-mentioned potential uses. Initially, the net proceeds may be used to make short-term investments. Under current policy, the Office of Thrift Supervision (the "OTS") does not impose any capital adequacy requirements on the Company, but does impose such capital adequacy requirements on the Bank. To the extent the Company contributes a portion of the net proceeds received from the sale of the Capital Securities to the Bank, such proceeds would qualify as Tier 1 capital at the Bank level under the current capital adequacy guidelines of the OTS. See "Use of Proceeds." RISK FACTORS Prospective investors should carefully consider the matters set forth under "Risk Factors Related to the Capital Securities" and "Risk Factors Related to the Company." 10 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The selected consolidated financial and other data of the Company at or for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 and at or for the nine months ended September 30, 1997 and 1996, set forth below is derived in part from, and should be read in conjunction with, the Financial Statements of the Company and Notes thereto as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 presented elsewhere in this Prospectus. Financial information at September 30, 1997, and for the nine month periods ended September 30, 1997 and 1996 is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. Interim results at and for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The Company and the Bank did not pay any cash dividends in any of the periods set forth.
AT AT DECEMBER 31, SEPTEMBER 30, ------------------------------------------------- 1997 1996 1995 1994 1993 1992 ------------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) SELECTED BALANCE SHEET DATA: Total assets............ $ 294,102 $ 104,010 $ 74,136 $ 71,402 $ 78,256 $ 78,788 Securities held-to- maturity and FHLB stock.................. 8,065 8,837 2,700 2,860 3,883 4,829 Loans held for sale..... 191,555 31,018 21,688 17,070 2,348 4,499 Loans held for investment............. 33,992 38,520 42,870 47,939 64,820 61,182 Allowance for estimated loan losses............ 1,859 1,625 1,177 832 436 308 Residual asset at fair value.................. 24,533 5,700 -- -- -- -- Mortgage servicing rights................. 5,713 2,645 683 -- -- -- Deposit accounts........ 159,840 85,711 67,535 65,689 72,008 71,719 Borrowings.............. 71,523 -- -- 1,250 1,200 2,000 Stockholders' equity.... 49,477 9,273 4,268 3,748 4,419 4,326 Book value per share(1)............... $ 7.56 $ 2.89 $ 2.29 $ 2.01 $ 2.37 $ 2.55 Shares outstanding(1)... 6,546,716 3,211,716 1,866,216 1,866,216 1,866,216 1,696,410
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31, ------------------- -------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) SELECTED OPERATING DATA: Interest income......... $ 12,152 $ 4,922 $ 6,929 $ 5,825 $ 4,824 $ 5,445 $ 6,143 Interest expense........ 7,101 2,699 3,766 3,448 2,721 3,045 3,687 --------- --------- --------- --------- --------- --------- --------- Net interest income.... 5,051 2,223 3,163 2,377 2,103 2,400 2,456 Provision for estimated loan losses............ 900 359 963 1,194 1,306 404 129 --------- --------- --------- --------- --------- --------- --------- Net interest income after provision for estimated loan losses................ 4,151 1,864 2,200 1,183 797 1,996 2,327 Net gains from mortgage financing operations... 17,413 3,759 8,352 3,575 1,428 1,144 1,380 Other non-interest income................. 772 505 760 445 260 253 352 Non-interest expense: Compensation and benefits.............. 5,534 3,206 5,233 2,544 1,575 1,403 1,426 Net loss on foreclosed real estate........... 94 171 158 53 280 228 78 SAIF special assessment............ -- 448 448 -- -- -- -- Other expense.......... 3,522 1,993 2,842 1,792 1,601 1,562 2,045 --------- --------- --------- --------- --------- --------- --------- Total non-interest expense............... 9,150 5,818 8,681 4,389 3,456 3,193 3,549 --------- --------- --------- --------- --------- --------- --------- Income (loss) before income tax provision (benefit).............. 13,186 310 2,631 814 (971) 200 510 Income tax provision (benefit).............. 5,491 142 1,126 294 (300) 107 148 --------- --------- --------- --------- --------- --------- --------- Net income (loss)....... $ 7,695 $ 168 $ 1,505 $ 520 $ (671) $ 93 $ 362 ========= ========= ========= ========= ========= ========= ========= Earnings (loss) per share(2)............... $ 1.70 $ 0.08 $ 0.63 $ 0.28 $ (0.36) $ 0.05 $ 0.22 ========= ========= ========= ========= ========= ========= ========= Weighted average shares outstanding(2)......... 4,522,251 2,090,466 2,370,779 1,866,216 1,866,216 1,823,765 1,644,886 ========= ========= ========= ========= ========= ========= =========
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AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------ ---------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- ------- ------- (DOLLARS IN THOUSANDS) SELECTED FINANCIAL RATIOS AND OTHER DATA(3): PERFORMANCE RATIOS: Return on average assets................ 5.07% 0.27% 1.74% 0.69% (0.89)% 0.12% 0.46% Return on average equity................ 44.25 4.30 24.99 13.64 (17.01) 2.11 8.92 Average equity to average assets........ 11.46 6.28 6.98 5.04 5.22 5.51 5.17 Equity to total assets at end of period...... 16.82 9.40 8.92 5.76 5.25 5.65 5.49 Average interest rate spread(4)............. 3.16 3.72 3.76 3.09 2.79 3.02 3.04 Net interest margin(5)............. 3.76 3.86 3.94 3.25 2.88 3.14 4.29 Average interest- earning assets to average interest- bearing liabilities... 111.35 102.96 103.90 103.50 102.27 103.08 103.64 Efficiency Ratio(6).... 38.97 87.05 69.43 67.78 83.78 78.09 82.88 Ratio of Earnings to Fixed Charges: Excluding interest on deposits.............. 7.82 1.88 6.53 3.05 (2.11) 1.54 2.67 Including interest on deposits.............. 2.79 1.11 1.66 1.23 0.66 1.06 1.13 LOAN ORIGINATIONS AND PURCHASES.............. $433,408 $148,389 $222,553 $134,772 $72,815 $82,015 $90,870 BANK REGULATORY CAPITAL RATIOS(7): Tangible capital....... 6.19% 9.40% 8.90% 5.68% 5.25% 5.65% 5.49% Core capital........... 6.19 9.40 8.90 5.68 5.25 5.65 5.49 Risk-based capital..... 13.49 16.06 9.43 10.17 10.00 10.87 10.56 ASSET QUALITY RATIOS: Non-performing assets as a percent of total assets(8)............. 1.38% 3.36% 2.86% 3.00% 3.42% 5.05% 4.15% Allowance for estimated loan losses as a percent of non- performing loans...... 60.49 55.66 67.26 84.25 44.04 20.02 16.29
- -------- (1) Book value per share is based upon the shares outstanding at the end of each period, adjusted for a 100% stock dividend which occurred during 1996. Book value per share is then adjusted for the exchange of three shares of Company Common Stock for one share of Bank common stock in the Reorganization. (2) Earnings per share is based upon the weighted average shares outstanding during the period, adjusted for a 100% stock dividend which occurred during 1996. Earnings per share is then adjusted for the exchange of three shares of Company Common Stock for one share of Bank common stock in the Reorganization. (3) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average daily or average month-end balances during the indicated periods. (4) The average interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (5) The net interest margin represents net interest income as a percent of average interest-earning assets. (6) The efficiency ratio represents noninterest expense less (gain) loss on foreclosed real estate divided by noninterest income plus net interest income before provision for estimated loan losses. (7) For definitions and further information relating to the Bank's regulatory capital requirements, see "Regulation--Federal Savings Institution Regulation--Capital Requirements." (8) Non-performing assets consist of non-performing loans and REO. See "Business--Lending Overview--Non-Accrual and Past-Due Loans" and "--REO." 12 QUARTERLY OPERATING AND OTHER DATA Financial information of the Company at September 30, June 30, and March 31, 1997 and December 31 and September 30, 1996 and for the quarters ended September 30, June 30, and March 31, 1997, and December 31 and September 30, 1996 is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the results of such interim periods. Interim results at or for the quarters ended September 30, June 30, and March 31, 1997 are not necessarily indicative of the results for the year ending December 31, 1997.
AT OR FOR THE QUARTER ENDED ------------------------------------------------------------ SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, 1997 1997 1997 1996 1996 ------------- -------- --------- ------------ ------------- (DOLLARS IN THOUSANDS) SELECTED OPERATING DATA: Interest income......... $ 5,697 $ 4,151 $ 2,304 $ 2,007 $ 1,569 Interest expense........ 3,080 2,460 1,561 1,067 844 -------- -------- ------- ------- ------- Net interest income... 2,617 1,691 743 940 725 Provision for estimated loan losses............ 400 -- 500 604 251 -------- -------- ------- ------- ------- Net interest income after provision for estimated loan losses............... 2,217 1,691 243 336 474 Net gains from mortgage financing operations... 8,344 3,192 5,877 4,593 1,599 Other non-interest income................. 358 206 208 256 192 Non-interest expense: Compensation and benefits............. 2,477 1,475 1,582 2,026 1,056 Net loss (gain) on foreclosed real estate............... 25 6 63 (13) 71 SAIF Special Assessment........... -- -- -- -- 448 Other expense......... 1,677 998 847 851 671 -------- -------- ------- ------- ------- Total non-interest expense............ 4,179 2,479 2,492 2,864 2,246 -------- -------- ------- ------- ------- Income before income tax provision.............. 6,740 2,610 3,836 2,321 19 Income tax provision.... 2,809 1,088 1,594 984 17 -------- -------- ------- ------- ------- Net income.............. $ 3,931 $ 1,522 $ 2,242 $ 1,337 $ 2 ======== ======== ======= ======= ======= Earnings per share(1)... $ 0.57 $ 0.47 $ 0.70 $ 0.42 $ 0.00 ======== ======== ======= ======= ======= SELECTED FINANCIAL RATIOS AND OTHER DATA(2): PERFORMANCE RATIOS: Return on average assets............... 5.41% 3.45% 6.32% 5.56% 0.01% Return on average equity............... 33.32 48.91 90.48 61.35 0.12 Average equity to average assets....... 16.24 7.05 6.99 8.77 8.42 Equity to total assets at end of period..... 16.82 21.38 7.30 8.92 9.40 Average interest rate spread(3)............ 3.15 3.97 2.32 4.09 3.93 Net interest margin(4)............ 4.27 4.08 2.44 4.22 3.95 Average interest- earning assets to average interest- bearing liabilities.. 122.31 101.78 102.43 104.64 103.25 Efficiency Ratio(5)... 36.70 48.59 35.57 49.70 86.45 LOAN ORIGINATIONS AND PURCHASES.............. $194,447 $152,230 $86,731 $74,164 $44,536 BANK REGULATORY CAPITAL RATIOS(6): Tangible capital...... 6.19% 7.47% 7.19% 8.90% 9.40% Core capital.......... 6.19 7.47 7.19 8.90 9.40 Risk-based capital.... 13.49 18.61 10.51 9.43 16.06 ASSET QUALITY RATIOS: Non-performing assets as a percent of total assets(7)............ 1.38 1.86 1.85 2.86 3.36 Allowance for estimated loan losses as a percent of non-performing loans................ 60.49 63.29 103.62 67.26 55.66
(footnotes on following page) 13 - -------- (1) Earnings per share is based on the weighted average shares outstanding during the period, adjusted for a 100% stock dividend which occurred during 1996. Earnings per share is then adjusted for the exchange of three shares of Company Common Stock for one share of Bank common stock in the Reorganization. (2) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average closing or average month-end balances during the indicated periods and are annualized where appropriate. (3) The average interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) The net interest margin represents net interest income as a percent of average interest-earning assets. (5) The efficiency ratio represents noninterest expense less (gain) loss on foreclosed real estate divided by noninterest income plus net interest income before provision for estimated loan losses. (6) For definitions and further information relating to the Bank's regulatory capital requirements, see "Regulation--Federal Savings Institution Regulation--Capital Requirements." (7) Non-performing assets consist of non-performing loans and REO. See "Business--Lending Overview--Non-Accrual and Past-Due Loans" and "--REO." 14 RISK FACTORS RELATED TO THE CAPITAL SECURITIES Prospective purchasers of Capital Securities should carefully review the information contained elsewhere in this Prospectus and should particularly consider the following matters. RANKING OF SUBORDINATE OBLIGATIONS UNDER THE GUARANTEE AND JUNIOR SUBORDINATED DEBENTURES The obligations of the Company under the Guarantee and under the Junior Subordinated Debentures will be unsecured and subordinate and rank junior in right of payment to all present and future Senior Indebtedness of the Company to the extent and in the manner set forth in the Guarantee and the Indenture, respectively. No payment may be made of the principal of, or premium, if any, or interest on the Junior Subordinated Debentures, or in respect of any redemption, retirement, purchase or other acquisition of any of the Junior Subordinated Debentures, or under the Guarantee, at any time when (i) there shall have occurred and be continuing a default in any payment in respect of any Senior Indebtedness, or there has been an acceleration of the maturity thereof because of a default or (ii) in the event of the acceleration of the maturity of the Junior Subordinated Debentures, until payment has been made on all Allocable Amounts (as defined herein) of Senior Indebtedness. At September 30, 1997, the Company had no Senior Indebtedness. None of the Guarantee, the Indenture, the Common Guarantee or the Declaration places any limitation on the amount of secured or unsecured debt, including Senior Indebtedness, that may be incurred by the Company in the future. The Company may from time to time to incur additional indebtedness constituting Senior Indebtedness. See "Description of Junior Subordinated Debentures--Subordination" and "Description of the Guarantee--Status." The ability of the Trust to pay amounts due on the Capital Securities is wholly dependent upon the Company making payments on the Junior Convertible Subordinated Debentures as and when required. HOLDING COMPANY STRUCTURE Because the Company is a holding company, the right of the Company to participate in any distribution of assets of any subsidiary upon such subsidiary's liquidation or reorganization or otherwise (and thus the ability of holders of the Capital Securities to benefit indirectly from such distribution) is subject to the prior claims of creditors of that subsidiary (including depositors in the case of the Bank), except to the extent that the Company may itself be recognized as a creditor of that subsidiary. At September 30, 1997, the subsidiaries of the Company had total liabilities (excluding liabilities owed to the Company) of approximately $242.6 million, including deposits, in the case of the Bank. Accordingly, the Capital Securities will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries, and holders of Capital Securities should look only to the assets of the Company for payments on the Capital Securities. None of the Guarantee, the Indenture, the Common Guarantee or the Declaration places any limitation on the amount of secured or unsecured debt that may be incurred by the Company's subsidiaries in the future. See "Description of Junior Convertible Subordinated Debentures--General" and "Description of the Guarantee--General." In addition, as the Company is a holding company, a majority of the operating assets of the Company are owned by the Company's subsidiaries. The Company may rely on dividends from such subsidiaries to meet its obligations for payment of principal and interest on its outstanding debt obligations and corporate expenses. To the extent that the Company becomes dependent on the Bank for such payments, the Bank will be subject to certain restrictions imposed by federal law on any extensions of credit to, and certain other transactions with, the Company and certain other affiliates, and on investments in stock or other securities thereof. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by various types of collateral. Further, such secured loans, other transactions and investments by the Bank are generally limited in amount as to the Company and as to each of such other affiliates to 10% of the Bank's capital and surplus and as to the Company and all of such other affiliates to an aggregate of 20% of the Bank's capital and surplus. In addition, payment of dividends to the Company by the Bank is subject to ongoing review by banking regulators and is subject to various statutory limitations and in certain circumstances requires prior approval by banking regulatory authorities. Federal regulatory agencies also have the authority to limit further 15 the Bank's payment of dividends based on other factors, such as the maintenance of adequate capital for the Bank, which could reduce the amount of dividends otherwise payable to the Company. OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSIDERATIONS So long as no Debenture Event of Default shall have occurred and be continuing, the Company will have the right under the Indenture to defer payments of interest on the Junior Subordinated Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters with respect to each Extension Period, provided that no Extension Period may extend beyond the Stated Maturity Date. Upon any such deferral, quarterly Distributions on the Capital Securities by the Trust will be deferred (and the amount of Distributions to which holders of the Capital Securities are entitled will accumulate additional Distributions thereon at the rate of % per annum, compounded quarterly (to the extent permitted by applicable law)) from the relevant payment date for such Distributions during any such Extension Period. The Company may extend any existing Extension Period, provided that such extension does not cause such Extension Period to exceed 20 consecutive quarters or to extend beyond the Stated Maturity Date. Upon the expiration of any Extension Period and the payment of all interest then accrued and unpaid on the Junior Subordinated Debentures (together with interest thereon at the annual rate of %, compounded quarterly, to the extent permitted by applicable law), the Company may elect to begin a new Extension Period, subject to the above requirements. There is no limitation on the number of times that the Company may elect to begin an Extension Period. See "Description of Capital Securities--Distributions" and "Description of Junior Convertible Subordinated Debentures--Option to Extend Interest Payment Period." The Company believes that, as a result of its inability to pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, its Common Stock during an Extension Period and the additional restrictions imposed upon it to the extent described under "Description of Junior Convertible Subordinated Debentures--Option to Extend Interest Payment Date," the likelihood of its exercising its right to defer payments of interest is remote. However, should the Company exercise its rights to defer payments of interest by extending the interest payment period or should the Junior Subordinated Debentures be deemed to have been issued with original issue discount ("OID"), each holder of Capital Securities will be required to accrue income (as OID) for federal income tax purposes in respect of the deferred interest allocable to its Capital Securities. As a result, holders of Capital Securities will recognize income for federal income tax purposes in advance of the receipt of cash and will not receive the cash from the Trust related to such income if such holder disposes of its Capital Securities prior to the record date for the date on which Distributions of such amounts are made. The Company has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Junior Subordinated Debentures. However, should the Company determine to exercise such right in the future, the market price of the Capital Securities is likely to be affected. A holder that disposes of its Capital Securities during an Extension Period, therefore, might not receive the same return on its investment as a holder that continues to hold its Capital Securities. In addition, as a result of the existence of the Company's rights to defer interest payments, the market price of the Capital Securities (which represents a preferred undivided beneficial interest in the Junior Subordinated Debentures) may be more volatile than other securities on which OID accrues that do not have such rights. See "Certain Federal Income Tax Considerations--Interest, Original Issue Discount, Premium and Market Discount" and "--Sales or Redemption of Capital Securities." REDEMPTION OR DISTRIBUTION Upon the occurrence and continuation of a Special Event (including a Tax Event, a Regulatory Capital Event or an Investment Company Event, in each case as defined under "Description of Junior Convertible Subordinated Debentures-- Special Event Prepayment"), the Company will have the right to prepay the Junior Subordinated Debentures, in whole, but not in part, at the Special Event Prepayment Price within 90 days following the occurrence of such Special Event and therefore cause a mandatory redemption of the Capital Securities at the Special Event Redemption Price. On or after the Initial Optional Prepayment Date, the Company 16 may prepay the Junior Subordinated Debentures, in whole or in part, for any reason and thereby cause an optional redemption of the Capital Securities, in whole or in part, at the Optional Redemption Price. See "Description of Capital Securities--Redemption" and "--Liquidation of the Trust and Distribution of Junior Subordinated Debentures." The Company will have the right at any time to dissolve the Trust and, after satisfaction of or provision for liabilities to creditors of the Trust as required by applicable law, cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Securities in liquidation of the Trust. Such right is subject to the Company having received an opinion of counsel to the effect that such distribution will not be a taxable event to holders of Capital Securities. Under current federal income tax law, a distribution of Junior Subordinated Debentures upon the dissolution of the Trust would not be a taxable event to holders of the Capital Securities. If, however, the Trust is characterized for federal income tax purposes as an association taxable as a corporation at the time of dissolution of the Trust, the distribution of the Junior Subordinated Debentures may constitute a taxable event to holders of Capital Securities. Moreover, upon the occurrence of a Special Event, a dissolution of the Trust in which holders of the Capital Securities receive cash would be a taxable event to such holders. See "Certain Federal Income Tax Considerations--Receipt of Junior Subordinated Debentures Upon Liquidation of the Trust." The Company believes that under current law it is entitled to deduct the interest accruing on the Junior Subordinated Debentures. Under the Taxpayer Relief Act of 1997, enacted on August 5, 1997, issuers of certain convertible debt instruments are not entitled to deduct interest thereon. For example, interest is not deductible if the debt instrument is convertible into equity of the issuer (or a related party) at the option of the holder and there is a substantial certainty that the holder will exercise the conversion option. Similarly, interest is not deductible if the debt instrument is part of an arrangement which is reasonably expected to result in a conversion at the option of the issuer (or a related party). The Company believes that this legislation should not apply to the Junior Subordinated Debentures. The Internal Revenue Service (the "Service"), however, has not yet issued any guidance regarding its interpretation of the new legislation. There can be no assurance that the Service will not take the position that interest on the Junior Subordinated Debentures is not deductible. Accordingly, there can be no assurance that an audit or future interpretation by the Service of the new legislation will not result in a Tax Event and an early redemption of the Capital Securities before, or after, , at the Special Event Redemption Price. In addition, in recent years, there have been several proposals to adopt legislation which, if enacted and made applicable to the Junior Subordinated Debentures, would preclude the Company from deducting interest thereon. The most recent proposal was made by the Clinton Administration on March 19, 1997. Such proposals have not been adopted by Congress, but there can be no assurance that similar proposals will not be adopted in the future and made applicable to the Junior Subordinated Debentures. Accordingly, there can be no assurance that any such legislation will not result in a Tax Event which would permit the Company to cause a redemption of the Capital Securities before, or after, , at the Special Event Redemption Price. Under current law, the Bank is a federal savings association, and the Company is a savings and loan holding company that is not subject to regulation as a bank holding company under the Bank Holding Company Act of 1956, as amended. However, legislation currently pending in Congress, known as the Financial Services Competition Act of 1997, provides for the termination of federal savings association charters and their conversion into bank charters. This legislation also provides for the registration of the holding companies of converted federal savings associations as bank holding companies, with certain grandfathered rights not available to other bank holding companies. In the event that this legislation is adopted, the Company could be required to register, and become subject to regulation, as a bank holding company. The currently pending legislation would grandfather the manner of regulation of regulatory capital currently applicable to savings and loan holding companies, subject to certain conditions. However, the grandfather protection would be lost under certain circumstances such as a change in control of the holding company. Bank holding companies, unlike savings and loan holding companies such as the Company, are subject to consolidated regulatory capital adequacy 17 requirements. Currently, the Company is not subject to any consolidated regulatory capital adequacy requirements. A bank holding company would only be able to include the amount of the proceeds received from the Offering in calculating the company's consolidated capital adequacy requirements to an amount not exceeding 25% of the Company's Tier 1 capital. There can be no assurance that the adoption of this or any other similar legislation in the future will not result in a Regulatory Capital Event (as defined herein) which would permit the Company to cause a redemption of the Capital Securities at any time before, or after, , at the Special Event Redemption Price. See "Description of Capital Securities--Redemption," "Description of Junior Convertible Subordinated Debentures--Special Event Prepayment" and "Certain Federal Income Tax Considerations--Sale or Redemption of Capital Securities." See also "--Absence of Public Market and Transfer Restrictions" for information concerning the listing of the Junior Subordinated Debentures. TERMINATION OF CONVERSION RIGHTS On and after , , the Company may, subject to certain conditions including advance public notice, at its option, cause the conversion rights of holders of Junior Subordinated Debentures to terminate, provided that the Closing Price of the Common Stock exceeds % of the then applicable Conversion Price of the Capital Securities for a specified period, in which case the right to convert the Capital Securities into Common Stock will likewise terminate thereby limiting the rights of the holders to those of a creditor of the Company. See "Description of Capital Securities--Conversion Rights-- Termination of Conversion Rights." POSSIBLE ADVERSE EFFECT ON MARKET PRICES There can be no assurance as to the market prices for the Capital Securities or, if a termination of the Trust were to occur, for the Junior Subordinated Debentures distributed to the holders of Capital Securities. Accordingly, the Capital Securities or the Junior Subordinated Debentures may trade at a discount from the price that the investor paid to purchase the Capital Securities offered hereby. Because holders of Capital Securities may receive Junior Subordinated Debentures in liquidation of the Trust and because Distributions are otherwise limited to payments on the Junior Subordinated Debentures, prospective purchasers of Capital Securities are also making an investment decision with regard to the Junior Subordinated Debentures and should carefully review all the information regarding the Junior Subordinated Debentures contained herein. See "Description of Junior Convertible Subordinated Debentures." RIGHTS UNDER THE GUARANTEE State Street will act as Guarantee Trustee and will hold the Guarantee for the benefit of the holders of the Capital Securities. State Street also will act as Property Trustee and as Debenture Trustee under the Indenture. Delaware Trust will act as Delaware Trustee under the Declaration. The Guarantee will guarantee to the holders of the Capital Securities the following payments, to the extent not paid by the Trust: (i) any accumulated and unpaid Distributions required to be paid on the Capital Securities, to the extent that the Trust has funds on hand legally available therefor; (ii) the applicable Redemption Price with respect to any Capital Securities called for redemption, to the extent that the Trust has funds on hand legally available therefor; and (iii) upon a voluntary or involuntary dissolution, winding up or liquidation of the Trust (unless the Junior Subordinated Debentures are distributed to holders of the Capital Securities), the lesser of (a) the aggregate of the Liquidation Amount and all accumulated and unpaid Distributions to the date of payment, to the extent that the Trust has funds on hand legally available therefor on such date and (b) the amount of assets of the Trust remaining available for distribution to holders of the Capital Securities on such date. The holders of a majority in Liquidation Amount of the Capital Securities will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of the Guarantee or to direct the exercise of any trust power conferred upon the Guarantee Trustee. Any holder of the Capital Securities may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against the Trust, the Guarantee Trustee or any other person or entity. If the Company defaults on its 18 obligation to pay amounts payable under the Junior Subordinated Debentures, the Trust will not have sufficient funds for the payment of Distributions or amounts payable on redemption of the Capital Securities or otherwise, and, in such event, holders of the Capital Securities will not be able to rely upon the Guarantee for payment of such amounts. Instead, in the event a Debenture Event of Default shall have occurred and be continuing and such event is attributable to the failure of the Company to pay principal of or premium, if any, or interest on the Junior Subordinated Debentures on the payment date on which such payment is due and payable, then a holder of Capital Securities may institute a legal proceeding directly against the Company for enforcement of payment to such holder of the principal of or premium, if any, or interest on such Junior Subordinated Debentures having a principal amount equal to the Liquidation Amount of the Capital Securities of such holder (a "Direct Action"). Notwithstanding any payments made to a holder of Capital Securities by the Company in connection with a Direct Action, the Company shall remain obligated to pay the principal of and premium, if any, and interest on the Junior Subordinated Debentures, and the Company shall be subrogated to the rights of the holder of such Capital Securities with respect to payments on the Capital Securities to the extent of any payments made by the Company to such holder in any Direct Action. Except as described herein, holders of Capital Securities will not be able to exercise directly any other remedy available to the holders of the Junior Subordinated Debentures or to assert directly any other rights in respect of the Junior Subordinated Debentures. See "Description of Junior Convertible Subordinated Debentures--Enforcement of Certain Rights by Holders of Capital Securities" and "--Debenture Events of Default" and "Description of the Guarantee." The Declaration will provide that each holder of Capital Securities by acceptance thereof agrees to the provisions of the Indenture. LIMITED VOTING RIGHTS Holders of Capital Securities generally will have voting rights relating only to the modification of the terms of the Capital Securities and the exercise of the Trust's rights as holder of the Junior Subordinated Debentures. Holders of Capital Securities will not be entitled to vote to appoint, remove or replace, or to increase or decrease the number of, the Issuer Trustees or Administrators, which voting rights are vested exclusively in the holder of the Common Securities, except as described under "Description of Capital Securities--Removal of Issuer Trustees and Administrators." See "Description of Capital Securities--Voting Rights; Amendment of the Declaration." TRADING PRICE The Capital Securities may trade at a price that does not fully reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A holder using the accrual method of accounting (and a cash method holder, during and after an Extension Period or if the Junior Subordinated Debentures are deemed to have been issued with OID) who disposes of its Capital Securities between Distribution Record Dates (as defined herein) will be required to include accrued but unpaid interest (or OID) on the Junior Subordinated Debentures through the date of disposition in income as ordinary income and to add such amount to its adjusted tax basis in its share of the underlying Junior Subordinated Debentures deemed disposed of. To the extent the selling price is less than the holder's adjusted tax basis, a holder will recognize a capital loss. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for federal income tax purposes. See "Certain Federal Income Tax Considerations--Interest, Original Issue Discount, Premium and Market Discount" and "--Sale or Redemption of Capital Securities." ABSENCE OF PUBLIC MARKET AND TRANSFER RESTRICTIONS There is no existing market for the Capital Securities and there can be no assurance as to the liquidity of any markets that may develop for the Capital Securities, the ability of the holders to sell their Capital Securities or at what price holders of the Capital Securities will be able to sell their Capital Securities, as the case may be. Future trading prices of the Capital Securities will depend on many factors including, among other things, prevailing interest rates, the Company's operating results, and the market for similar securities. Although the Company has applied to have the Capital Securities approved for quotation on the Nasdaq, there can be no assurance that such application will be approved, that an active trading market for the Capital Securities will develop or, if one does develop, that it will be maintained. In addition, notwithstanding the registration of the Capital Securities, holders who are "affiliates" of the Company or the Trust as defined under Rule 405 of the 19 Securities Act may publicly offer for sale or resell the Capital Securities only in compliance with the provisions of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). In addition, in the event that the Trust is terminated by the Company and Junior Subordinated Debentures are distributed to holders of Capital Securities, the Company, under the terms of the Indenture, will use its best efforts to have the Junior Subordinated Debentures approved for quotation on the Nasdaq or an exchange. There can be no assurance that such application will be approved, that an active trading market for the Junior Subordinated Debentures will develop, or if one does develop, that it will be maintained. RISK FACTORS RELATED TO THE COMPANY ABILITY OF THE COMPANY TO IMPLEMENT ITS BUSINESS STRATEGY The Company's business strategy is dependent upon its ability to increase its loan volume through the nationwide growth of its network of Originators, while maintaining its existing levels of origination costs, interest rate spreads and underwriting criteria. Implementation of this strategy will depend in large part on the Company's ability to: (i) expand its network of Originators in markets with a sufficient concentration of borrowers meeting the Company's underwriting criteria; (ii) obtain adequate financing on favorable terms to fund its growth strategy; (iii) profitably sell its loans through securitizations or in the secondary market on a regular basis; (iv) attract and retain skilled employees; and (v) continue to expand in the face of increasing competition from other mortgage lenders. The Company's failure with respect to any of these factors could impair its ability to successfully implement its business strategy, which would have a material adverse effect on the Company's results of operations, financial condition and cash flows. In addition, there can be no assurance that the Company will achieve its planned expansion in a timely and cost-effective manner or, if achieved, that the expansion will result in profitable operations. Although the Company has no current plans to modify its current strategy, because of the dynamic changes occurring in the financial services industry, the Company may revise its business plan by developing new consumer or commercial loan products or expanding into new markets. There can be no assurance that any such revised strategy would be as profitable or successful as the existing strategy has been historically. See "Business." RISKS ASSOCIATED WITH MORTGAGE ORIGINATION, PURCHASE AND SALE ACTIVITIES The Company has been actively involved in the origination, purchase and sale to Loan Purchasers and, since the fourth quarter of 1996, in securitizations of real estate secured loans. Generally, the profitability of such mortgage financing operations depends on maintaining a sufficient volume of loans for sale and the availability of Loan Purchasers. Changes in the level of interest rates and economic factors may affect the amount of loans originated or available for purchase by the Company, and thus the availability of net gains from mortgage financing operations and servicing fee income. Changes in the purchasing policies of Loan Purchasers or increases in defaults after funding could substantially reduce the amount of loans sold to such Loan Purchasers or through asset securitizations. Any such changes could have a material adverse effect on the Company's results of operations, financial condition and cash flows. Therefore, between the time the Company originates loans and purchase commitments are issued or securitizations are completed, the Company is exposed to downward movements in the market price of such loans due to upward movements in interest rates. In order to reduce these risks, the Company has recently adopted a hedging policy. There can be no assurances, however, that the Company's exposure to such risks will be reduced by pursuing this policy. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Management of Interest Rate Risk." See "Business--Core Lending Products--Origination and Purchase of Loans" and "--Loan Sales and Asset Securitizations" and "--Sources of Funds." In addition to its lending activity in California, the Company has originated or purchased a significant number of one- to four-family residential mortgage loans on a nationwide basis through its network of Originators. Management believes that originating and purchasing loans secured by properties located across the country results in a geographically diversified lending operation which reduces certain risks associated with loan 20 concentrations in a single area. However, there are certain other risks involved in nationwide lending. The Company may not have the same depth of experience or knowledge about particular markets in which it lends as other lenders with the staff physically located in such market areas. Some of the properties may be located in states which are experiencing adverse economic conditions, including a general softening in real estate markets and the local economies, which may result in increased loan delinquencies and loan losses. Additionally, regulations and practices regarding the liquidation of properties (e.g., foreclosure) and the rights of mortgagors in default vary greatly from state to state, and these restrictions may limit the Company's ability to foreclose on a property or seek other recovery. See "Business--Core Lending Products--Origination and Purchase of Loans" and "--Lending Overview-- Delinquencies and Classified Assets." DEPENDENCE ON ASSET SECURITIZATIONS AND IMPACT ON QUARTERLY OPERATING RESULTS Since the fourth quarter of 1996, the Company completed three securitizations, which involved an aggregate of $255.9 million of loans and generated total net gains from securitizations of approximately $21.3 million. A significant component of management's business strategy is to generate revenue and net income and provide funding for future originations and purchases of loans through securitizations on a regular basis. There can be no assurance, however, that the Company will be able to successfully implement this strategy. Several factors will affect the Company's ability to complete securitizations, including conditions in the securities markets generally and in the asset-backed securities markets specifically, the credit quality of the Company's loan portfolio and the Company's ability to obtain credit enhancements. In addition, although the Company has tracked the performance of its portfolio of loans, it did not, prior to the fourth quarter of 1996, have the ability to track loans by core products. As a result, if loans do not perform up to original expectations, the Company may not be able to securitize loans on economic terms as favorable as those conducted to date. Although the Company obtained a credit enhancement in the securitizations completed to date which facilitated an investment grade rating for the securitization interests in each instance, there can be no assurance that the Company will be able to obtain future credit enhancements on acceptable terms or that future securitizations will be similarly rated. Any substantial reduction in the ability of the Company to complete securitizations could have a material adverse effect on the Company's results of operations, financial condition and cash flows. The Company's future revenues and net income are expected to fluctuate in large part as a result of the timing and size of its future securitizations. A delay in closing a scheduled securitization during a particular quarter would postpone recognition of net gains from mortgage financing operations. In addition, unanticipated delays in closing a securitization could also increase the Company's exposure to credit risks and interest rate fluctuations by increasing the period during which the Company holds its loans. If the Company were unable to profitably securitize a sufficient number of its loans in a particular reporting period, the Company's revenues for such period would decline and would result in lower net income and possibly a net loss for such period, and could have a material adverse effect on the Company's results of operations, financial condition, and cash flows and the Bank's capital ratios. In addition, the Company projects the expected cash flows over the life of the residual interests, using prepayment and default assumptions that market participants would use for similar financial instruments that are subject to prepayment, credit and interest rate risks. The Company then determines the present value of these cash flows using an interest rate commensurate with the risks involved. If the Company's actual experience differs materially from the assumptions used in the determination of the present value of the residual interests, future cash flows and earnings could be negatively impacted. See "Business--Loan Sales and Asset Securitizations." RISKS RELATED TO MORTGAGE SERVICING RIGHTS AND RESIDUAL ASSETS To determine the fair value of its mortgage servicing rights, the Company projects net cash flows expected to be received over the life of the underlying loans. Such projections assume certain servicing costs, prepayment rates and delinquencies. As of September 30, 1997, the carrying value of the Company's mortgage servicing rights totalled $5.7 million, up from $2.6 million at December 31, 1996. In addition, the pooling and servicing agreements relating to the Company's securitizations contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates, which, if exceeded, would allow the termination of the Company's 21 right to service the related loans. The mortgage servicing rights on the loans securitized during the fourth quarter of 1996, the first quarter of 1997, and the third quarter of 1997 totalled approximately $4.7 million. There can be no assurance that the Company's estimates used to determine the fair value of mortgage servicing rights will remain appropriate for the life of the loans sold or the securitizations. If actual loan prepayments or delinquencies exceed the Company's estimates, the carrying value of the Company's mortgage servicing rights may have to be written down through a charge against earnings. The Company cannot write up such assets to reflect slower than expected prepayments, although slower prepayments may increase future earnings as the Company will receive cash flows in excess of those anticipated. Fluctuations in interest rates may also result in a write-down of the Company's mortgage servicing rights in subsequent periods. The Company records net gains from mortgage financing operations through securitizations based in part on the fair value of the residuals received by the Company related to such loans, which are classified as trading securities. The fair values of such residuals are in turn based in part on market interest rates and projected loan prepayment and credit loss rates. Increases in interest rates or higher than anticipated rates of loan prepayments or credit losses of these or similar securities may require the Company to write down the value of such residuals and result in a material adverse effect on the Company's results of operations and financial condition. During the three months ended September 30, 1997, the Company revalued the 1997-1A residual and recorded a pre-tax unrealized loss of $787,000 due to higher-than-expected prepayment speeds. See "Business--Loan Sales and Asset Securitizations." The Company is not aware of an active market for the residuals. No assurance can be given that the residuals could in fact be sold at their carrying value, if at all. LACK OF HISTORICAL EXPERIENCE DATA ON CORE PRODUCT LOANS Although the Company has typically monitored the delinquency, loss and prepayment experience in its total loan portfolio, prior to its first securitization in December 1996, the Company did not separately track the delinquency, loss and prepayment experience of core product loans by product type. Consequently, segregated performance data which would be used by the Company, analysts and rating agencies for purposes of estimating the future delinquency, loss and prepayment experience of its core product loans is of limited duration and therefore not as meaningful as data outstanding for a longer period of time. In view of the Company's lack of segmented core product loan performance data, the Company relied on a third party evaluation of its core product loan portfolio and therefore the Company's loss or prepayment assumptions used to calculate its gain on sale in connection with its securitizations or with future securitizations may be subject to fluctuations. Any material difference between these assumptions and actual performance could have a material adverse impact on the timing and/or receipt of the Company's future revenues, the value of the residual interests held on the Company's balance sheet and the Company's cash flow. RISKS ASSOCIATED WITH SUB-PRIME LENDING Through its Liberator Series program, the Company has developed a lending niche for the origination and purchase of mortgage loans to sub-prime borrowers (e.g. borrowers who do not qualify for credit under traditional FHLMC, FNMA or Government National Mortgage Association ("GNMA") guidelines). Loans to sub- prime borrowers present a higher level of risk of default than conforming loans because of the increased potential for default by borrowers who may have had previous credit problems or who do not have an adequate credit history. Loans to sub-prime borrowers also involve additional liquidity risks, as these loans generally have a more limited secondary market than conventional loans. The actual rates of delinquencies, foreclosures and losses on loans to sub-prime borrowers could be higher under adverse economic conditions than those currently experienced in the mortgage lending industry in general. The FDIC issued a letter to all FDIC-insured institutions highlighting the special risks associated with sub-prime lending and the need for management controls. While the Company believes that the underwriting procedures and appraisal processes it employs enable it to somewhat mitigate the higher risks inherent in loans made to these borrowers, no assurance can be given that such procedures or processes will afford adequate protection against such risks. See "Business-- Core Lending Products--Origination and Purchase of Loans" and "--Underwriting." 22 HIGH LOAN TO VALUE RATIOS OF PORTFOLIO SERIES LOANS Through its Portfolio Series program, the Company originates debt consolidation loans for Agency Qualified Borrowers. Portfolio Series loans are primarily home equity lines of credit and second deeds of trust generally up to 135% of the appraised value of the real estate underlying the loans. The Company recently increased the permissible loan-to-value ratio for Portfolio Series loans from 125% to 135% which may have the effect of increasing the loss rates on such loans. In the event of a default on a Portfolio Series loan by a borrower, there generally would be insufficient collateral to pay off the balance of such loan and the Company, as holder of a second position on the property, would likely lose a substantial portion, if not all, of its investment. While the Company believes that the underwriting procedures it employs enable it to somewhat mitigate the higher risks inherent in such loans, no assurance can be given that such procedures will afford adequate protection against such risks. During the fourth quarter of 1996 and the first, second and third quarters of 1997, of the core product loans originated by the Company, 42.9%, 55.3%, 64.9% and 61.3%, respectively, consisted of Portfolio Series loans. See "Business--Core Lending Products--Origination and Purchase of Loans," "--Underwriting," and "--Loan Sales and Asset Securitizations." CONTINGENT RISKS Although the Company sells substantially all of the mortgage loans it originates or purchases without recourse, the Company retains some degree of credit risk on substantially all of the loans it sells. In addition, during the period of time that the loans are held for sale, the Company is subject to various business risks associated with the lending business, including borrower default, foreclosure and the risk that a rapid increase in interest rates would result in a decline of the value of loans held for sale to potential purchasers. In connection with its securitizations, the Company is required to repurchase or substitute loans in the event of a breach of a representation or warranty made by the Company. While the Company may have recourse to the sellers of loans it purchased, there can be no assurance of the sellers' abilities to honor their respective obligations to the Company. Likewise, in connection with its whole loan sales, the Company enters agreements which generally require the Company to repurchase or substitute loans in the event of a breach of a representation or warranty made by the Company to the Loan Purchaser, any misrepresentation during the mortgage loan origination process or, in some cases, upon any fraud or early default on such mortgage loans. The remedies available to a Loan Purchaser from the Company are generally broader than those available to the Company against the sellers of such loans, and if a Loan Purchaser enforces its remedies against the Company, the Company may not be able to enforce whatever remedies the Company may have against such sellers. If the loans were originated directly by the Company, the Company will be solely responsible for any breaches of representations and warranties. In addition, borrowers, Loan Purchasers, monoline insurance carriers and trustees in the Company's securitizations may make claims against the Company arising from alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of employees, officers and agents of the Company, including appraisers, incomplete documentation and failure by the Company to comply with various laws and regulations applicable to its business. Any claims asserted in the future may result in liabilities or legal expenses that could have a material adverse effect on the Company's results of operations, financial condition, cash flows and business prospects. DEPENDENCE ON KEY PERSONNEL The Company depends to a considerable degree on the contributions of a limited number of key management personnel who have had, and will continue to have, a significant role in the development and management of the Company's mortgage financing operations. The continued development of the Company's business strategy depends to a large extent upon the continued employment of Daniel L. Perl, President and Chief Executive Officer of both the Company and the Bank. In addition, many members of senior management have had working relationships with Mr. Perl prior to joining the Company. The loss of such personnel, Mr. Perl or 23 other key personnel could materially adversely affect the Bank's and the Company's business. The Company and the Bank have each entered into three year employment agreements with Mr. Perl. See "The Board of Directors and Management of the Bank Agreements." RISKS RELATED TO DEBENTURES In March 1997, the Bank issued the Debentures in an amount of $10.0 million through a private placement and pursuant to a Debenture Purchase Agreement (the "Debenture Offering"). In the event that the Company and the Bank elect to substitute the Company as obligor on the Debentures (the "Substitution"), the holders of the Debentures will have the option, at September 15, 1998 or at such later time as the Substitution occurs, to require the Company to purchase all or part of their Debentures. In the event that all of the holders of the Debentures opt to require the Company to purchase their Debentures at September 15, 1998, the Company would be required to fund $10.0 million plus accrued interest to holders of the Debentures. Such an event would have a material adverse effect on the Company's liquidity. Furthermore, in the event that the Company has insufficient funds available to repurchase the Debentures, the Company may be required to borrow funds at more expensive rates than the interest rate on the Debentures, which would have a material adverse effect on the Company's results of operations. See "Business--Sources of Funds-- Borrowings." COMPETITION As a purchaser and originator of mortgage loans, the Company faces intense competition, primarily from mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. Many of these competitors in the financial services business are substantially larger and have more capital and other resources than the Company. Certain large national finance companies and conforming mortgage originators have announced their intention to adapt their conforming origination programs and allocate resources to the origination of non-conforming loans. Certain of these larger mortgage companies and commercial banks have begun to offer products similar to those offered by the Company, targeting customers similar to those of the Company. In addition, it is anticipated that the participation of government-sponsored entities with substantial capital resources in the origination of non-conforming loans will further intensify competition. The FHLMC recently announced its intention to support such originations by purchasing, guaranteeing and securitizing non-conforming loans originated by qualified institutions. Other government-sponsored entities, such as the FNMA or GNMA, may also enter into the market for non-conforming loans. The offering by these competitors of products similar to those of the Company's could have a material adverse effect on the Company's results of operations, financial condition and cash flows. The Company depends largely on Originators with whom the Company's competitors also seek to establish relationships. The Company's future results may become increasingly sensitive to fluctuations in the volume and cost of its wholesale loan purchases resulting from competition from other purchasers for such loans. In addition, as the Company expands into new geographic markets, it will face competition from lenders with established positions in these locations. There can be no assurance that the Company will be able to continue to compete successfully in the markets it serves. See "Business--Competition." AVAILABILITY OF FUNDING SOURCES The Company funds a substantial portion of the loans which it originates or purchases through deposits, lines of credit, internally generated funds or FHLB advances. The Company competes for deposits primarily on the basis of rates, and as a consequence the Company could experience difficulties in attracting deposits to fund its operations if it does not continue to offer deposit rates at levels that are competitive with other financial institutions. Certificate of deposit accounts constituted $140.9 million or 88.1% of total deposits at September 30, 1997, of which $134.3 million mature in one year or less. Further increases in short-term certificate accounts, which tend to be more sensitive to movements in market interest rates than core deposits, may result in the Company's deposit base being less stable than if it had a large amount of core deposits which in turn, may result in further increases in the Company's cost of deposits. The Company also uses the cash proceeds generated by the Company in selling loans in the secondary market or pools of loans in asset securitizations to fund subsequent 24 originations or purchases. The Bank has two warehouse lines of credit available in the aggregate amount of $250.0 million to fund loan originations, of which $54.6 million has been drawn upon at September 30, 1997, and is in the process of negotiating a third warehouse line of credit in the amount of $250.0 million. The Company has a line of credit in the amount of $40.0 million secured by residual assets created by the Company's securitizations. The lines of credit do not obligate the lenders to advance any amount of funds, and may be terminated by the lenders at will. See "Business--Sources of Funds-- Borrowings." To the extent that the Company is not able to maintain its currently available funding sources or to access new funding sources, it would have to curtail its loan production activities or sell loans earlier than is optimal. Any such event would have a material adverse effect on the Company's results of operations and financial condition. See "Business--Sources of Funds." MULTI-FAMILY AND COMMERCIAL REAL ESTATE RISKS As part of its lending strategy, the Company has targeted borrowers seeking loans secured by multi-family properties or properties used for commercial business purposes such as small office buildings or light industrial or retail facilities. Although such loans are generally originated for sale, the Company anticipates that its multi-family and commercial real estate portfolios will increase as a percentage of total assets in future periods. Multi-family and commercial real estate loans are generally considered to involve a higher degree of credit risk, be more vulnerable to deteriorating economic conditions and involve higher loan principal amounts than one- to four-family residential mortgage loans. Income producing property values are also subject to greater volatility than owner-occupied residential property values. Economic events and government regulations, which are outside the control of the borrower or lender, could impact the value of the security for such loans or the future cash flows of the affected properties. Further, any material decline in real estate values, such as the declines experienced in southern California in recent years, generally reduces the ability of borrowers to use equity to support borrowings and increases the loan-to-value ratios of loans previously made, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a borrower default. POTENTIAL IMPACT OF CHANGES IN INTEREST RATES The Company's profitability is dependent to a certain extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company's ability to originate, purchase and sell loans through its mortgage financing operations is significantly impacted by changes in interest rates. Increases in interest rates may also reduce the amount of loan and commitment fees received by the Company. A significant decline in interest rates could also decrease the size of the Company's servicing portfolio and the related servicing income by increasing the level of loan prepayments. Additionally, the interest rate adjustments with respect to the Company's investment securities lag rate adjustments to the Company's deposit accounts. Accordingly, the yield on the Company's investment securities may adjust more slowly than the cost of the Company's interest-bearing liabilities in a rising interest rate environment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Management of Interest Rate Risk." FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION The Company, as a savings and loan holding company, and the Bank, as a federal savings association, are subject to extensive federal laws, regulations and supervision. Such laws and regulations, which affect operations on a daily basis, may be changed at any time, and the interpretation of the relevant existing law and regulations is also subject to change by the federal regulatory authorities. Any failure of the Bank to comply with any of the laws and regulations to which it is subject or any change in the regulatory structure or the applicable statutes or regulations whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank, their respective operations. See "Regulation." Recently enacted legislation provides that the BIF and SAIF will merge on January 1, 1999 if there are no more savings associations as of that date. Several bills have been introduced in Congress that would eliminate 25 the federal thrift charter and the OTS. A bill reported in July 1997 by the House Banking Committee and in October 1997 by the House Commerce Committee would require federal thrifts to become national banks or state chartered commercial banks or savings banks within two years after enactment or they would, by operation of law, become national banks. A national bank resulting from a converted federal thrift could continue to engage in activities, including holding any assets, in which it was lawfully engaged on the day before the date of enactment. Branches operated on the day before enactment could be retained regardless of their permissibility for national banks. Subject to a grandfathering provision, all savings and loan holding companies would become subject to the same regulation and activities restrictions as bank holding companies. The grandfathering could be lost under certain circumstances, such as a change in control of the holding company. The legislative proposal would also abolish the OTS and transfer its functions to the federal bank regulators with respect to the depository institutions and to the Board of Governors of the Federal Reserve System ("Federal Reserve Board") with respect to the regulation of holding companies. The Bank is unable to predict whether the legislation will be enacted or, given such uncertainty, determine the extent to which the legislation, if enacted, would affect its business. The Bank is also unable to predict whether the SAIF and BIF will eventually be merged. Legislation regarding bad debt recapture was signed into law in August 1996 effective for tax years beginning on or after January 1, 1996. The legislation requires recapture of reserves accumulated after 1987. The recapture tax on post-1987 reserves must be paid over a six-year period starting in 1996. The payment of the tax can be deferred in each of 1996 and 1997 if an institution originates at least the same average annual principal amount of purchased mortgage loans that it originated in the six years prior to 1996. The Bank has previously recorded a deferred tax liability related to such legislation; therefore, such recapture is expected to have no effect on net income or federal income tax expense. See "Federal and State Taxation--Federal Taxation--Bad Debt Reserve." Recent federal legislation known as the Riegle Community Development and Regulatory Improvement Act (the "Riegle Act"), imposed additional regulatory requirements on mortgage loans having relatively higher origination fees and interest rates, such as some of the loans made by the Bank, and the Bank expects its business to be the focus of additional federal and state legislation, and regulation in the future. IMPACT OF LAWS AND REGULATIONS AFFECTING CERTAIN LENDING OPERATIONS In addition to federal regulations on its banking operations, the Bank's consumer lending activities are subject to consumer protection and other statutes including the Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act and Regulation B, as amended, the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate Settlement Procedures Act of 1974, as amended ("RESPA"), and Regulation X, the Fair Housing Act, the Home Mortgage Disclosure Act and Regulation C and the Federal Debt Collection Practices Act. These rules and regulations, among other things, establish eligibility criteria for mortgage loans, prohibit discrimination, provide for inspections and appraisals of properties, require credit reports on loan applicants, regulate assessment, collection, foreclosure and claims handling, investment and interest payments on escrow balances and payment features, mandate certain disclosures and notices to borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to comply with these requirements can lead to loss of status as an approved FNMA/FHLMC seller- solicitor, termination or suspension of servicing contracts without compensation to the servicer, demands for indemnifications or mortgage loan repurchases, certain rights of rescission for borrowers, class action lawsuits and administrative enforcement actions. Although the Company believes that it has systems and procedures to facilitate compliance with these requirements and believes that it is in compliance in all material respects with applicable local, state and federal laws, rules and regulations, in the future more restrictive laws, rules and regulations or the judicial interpretation of existing laws, rules and regulations could make compliance more difficult or expensive. See "Regulation." 26 ELIMINATION OF LENDER PAYMENTS TO BROKERS COULD ADVERSELY AFFECT RESULTS OF OPERATIONS Lawsuits have been filed against several mortgage lenders alleging that such lenders have made certain payments to independent mortgage brokers in violation of RESPA. These lawsuits have generally been filed on behalf of a purported nationwide class of borrowers alleging that payments made by a lender to a broker in addition to payments made by the borrower to a broker are prohibited by RESPA and are therefore illegal. If these cases are resolved against the lenders, it may cause an industry-wide change in the way independent mortgage brokers are compensated. The Bank's broker compensation programs permit such payments. Although the Bank believes that its broker compensation programs comply with all applicable laws and are consistent with long-standing industry practice and regulatory interpretations, in the future new regulatory interpretations or judicial decisions may require the Bank to change its broker compensation practices. Such a change may have a material adverse effect on the Bank and the entire mortgage lending industry. YEAR 2000 COMPLIANCE As the year 2000 approaches, a critical business issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. In brief, many existing application software products were designed to only accommodate a two digit date position which represents the year (e.g., '95 is stored on the system and represents the year 1995). The Company has implemented a program designed to ensure that all software used in connection with the Company's business will manage and manipulate data involving the transition from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such data. However, there can be no assurances that such program will be effective. To the extent the Company's systems are not fully year 2000 compliant, there can be no assurance that potential systems interruptions or the cost necessary to update software would not have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. In addition, the Company has limited information concerning the compliance status of its suppliers and customers. In the event that any of the Company's significant suppliers do not successfully and timely achieve year 2000 compliance, the Company's business or operations could be adversely affected. ENVIRONMENTAL RISKS In the course of its business, the Company has acquired, and may acquire in the future, properties securing loans that are in default. There is a risk that hazardous substances or waste, contaminants, pollutants or sources thereof could be discovered on such properties after acquisition by the Company. In such event, the Company may be required by law to remove such substances from the affected properties at its sole cost and expense. There can be no assurance that (i) the cost of such removal would not substantially exceed the value of the affected properties or the loans secured by the properties, (ii) the Company would have adequate remedies against the prior owner or other responsible parties or (iii) the Company would not find it difficult or impossible to sell the affected properties either prior to or following such removal. 27 USE OF PROCEEDS The proceeds to the Trust from the Offering of the Capital Securities will be $ . All of the proceeds from the sale of Capital Securities (together with the proceeds of the issuance of the Common Securities) will be invested by the Trust in the Junior Subordinated Debentures. The estimated net proceeds from the sale of the Junior Subordinated Debentures of approximately $ , after deducting the underwriting discount and estimated offering expenses, will be available to the Company for general corporate purposes, which may include, but not be limited to, the refinancing or prepayment of existing debt obligations, which may be of shorter maturity or higher coupon rate; the downstreaming of capital to the Bank, and the financing of future residuals resulting from securitizations; the acquisition of loan portfolios from other depository institutions or finance companies; and possible acquisitions of depository institutions or branches of depository institutions. The Company has not entered into any arrangement, agreement or understanding with respect to future acquisitions and there can be no assurances that it will do so in the future. No determination has been made as to the amount of proceeds, if any, that will be allocated to any of the above-mentioned potential uses. Initially, the net proceeds may be used to make short-term investments. Under current policy, the OTS does not impose any capital adequacy requirements on the Company, but rather imposes such capital adequacy requirements on the Bank. To the extent the Company contributes a portion of the net proceeds received from the sale of the Capital Securities to the Bank, such proceeds would qualify as Tier 1 capital at the Bank level under the current capital adequacy guidelines of the OTS. PRICE RANGE OF COMMON STOCK AND DIVIDENDS The Common Stock of the Company has been quoted on the Nasdaq National Market under the symbol "LFCO" since the Company's IPO on June 30, 1997. The following table summarizes the range of the high and low closing sale prices per share of Common Stock as quoted by Nasdaq for the periods indicated.
HIGH LOW ------- ------- MONTH ENDED June 30, 1997................................................ $13.50 $13.375 July 31, 1997................................................ 18.875 13.625 August 31, 1997.............................................. 18.675 15.875 September 30, 1997........................................... 19.25 17.00 October 31, 1997............................................. 21.875 16.625 November 30, 1997............................................ 18.375 14.875
As of September 16, 1997, there were approximately 348 holders of record of the Common Stock. The last reported sale price of the Common Stock on the Nasdaq as of a recent date is set forth on the cover pages of this Prospectus. The Company presently intends to retain all future earnings, if any, for use in its business and does not anticipate declaring or paying any cash dividends on its Common Stock in the foreseeable future. In the event that the Board of Directors does determine to pay dividends in the future, any such payment will depend upon a number of factors, including investment opportunities available to the Company or the Bank, capital requirements, regulatory limitations, the Company's or the Bank's financial condition and results of operations, tax considerations and general economic conditions. For information concerning federal regulations regarding the Bank's ability to make capital distributions to the Company, see "Regulation--Federal Savings Institution Regulation-- Limitation on Capital Distributions." The Company is subject to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. For a discussion of certain circumstances under which the Company may become subject to certain provisions of the California Corporation Code, see "Description of Capital Stock--Certain Anti-takeover Provisions." 28 RATIOS OF EARNINGS TO FIXED CHARGES The following table sets forth for the respective periods indicated the ratios of the Company's consolidated earnings to fixed charges. For purposes of computing the ratio, earnings represent pretax income before extraordinary item and cumulative effect of change in accounting principles plus fixed charges. Fixed charges, excluding interest on deposits, include interest expense (other than on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Fixed charges, including interest on deposits, include all interest expense and the proportion deemed representative of the interest factor of rent expense, net of income from subleases.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------- -------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ----- ---- ---- Ratio of Earnings to Fixed Charges: Excluding interest on deposits.......... 7.82 1.88 6.53 3.05 (2.11) 1.54 2.67 Including interest on deposits.......... 2.79 1.11 1.66 1.23 0.66 1.06 1.13
ACCOUNTING TREATMENT The financial statements of the Trust will be reflected in the Company's consolidated financial statements, with the Capital Securities shown as Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures of the Company. A footnote to such consolidated financial statements will indicate that the sole assets of the Trust are % Convertible Subordinated Debentures due 2027 of the Company with an original principal amount of $ ($ if the Underwriter's over-allotment option is exercised in full) and that the Guarantee, when taken together with the Company's obligations under the Convertible Debentures, the Indenture and the Declaration, provide a full and unconditional guarantee on a subordinated basis by the Company of the Trust's obligations under the Capital Securities. See "Capitalization." 29 CAPITALIZATION The following table sets forth, at September 30, 1997, the unaudited consolidated capitalization of the Company and its consolidated subsidiaries, and the pro forma capitalization of the Company as adjusted to give effect to the sale of the Capital Securities offered hereby and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." The information below should be read in conjunction with the Financial Statements and the Notes thereto which are included elsewhere herein.
AT SEPTEMBER 30, 1997 -------------------- ACTUAL AS ADJUSTED ------- ----------- (DOLLARS IN THOUSANDS) Subordinated debt due in fiscal 2004..................... $10,000 $10,000 ------- ------- Total long-term debt................................... $10,000 $10,000 ======= ======= Company obligated, mandatorily redeemable, convertible preferred securities of subsidiary trust holding solely subordinated debentures of the Company.................. -- ------- ------- Stockholders' equity..................................... Preferred stock, $.01 par value (5,000,000 shares authorized; no shares outstanding)...................... Common stock, $.01 par value (25,000,000 shares authorized and 6,546,716 shares issued and outstanding)............................................ 65 65 Additional paid-in capital............................... 41,834 Retained earnings........................................ 7,578 ------- Total stockholders' equity............................. 49,477 ------- Total capitalization................................. $59,477 ======= Bank Regulatory Capital Ratios: Tangible Capital....................................... 6.19% Core (leverage) capital................................ 6.19 Total risk-based capital............................... 13.49 Stockholders' equity to total assets..................... 16.82
30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated operating data presented below is derived in part from, and should be read in conjunction with, the Financial Statements and related notes of LIFE Financial Corporation, presented elsewhere in this Prospectus. The consolidated operating data for the nine-month periods ended September 30, 1997 and 1996 is derived from unaudited financial data, but, in the opinion of management reflects all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the results for such interim periods. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 1997.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------- ----------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income: Loans..................... $ 10,001 $ 4,674 $ 6,542 $ 5,433 $ 4,530 Securities held to maturity................. 334 55 56 159 138 Other interest-earning assets................... 1,817 193 331 233 156 --------- --------- --------- --------- --------- Total interest income... 12,152 4,922 6,929 5,825 4,824 --------- --------- --------- --------- --------- Interest expense: Deposit accounts.......... 5,440 2,507 3,514 3,192 2,534 FHLB advances and other borrowings............... 888 192 252 256 187 Subordinated debentures... 773 -- -- -- -- --------- --------- --------- --------- --------- Total interest expense.. 7,101 2,699 3,766 3,448 2,721 --------- --------- --------- --------- --------- Net interest income before provision for estimated loan losses............... 5,051 2,223 3,163 2,377 2,103 Provision for estimated loan losses..................... 900 359 963 1,194 1,306 --------- --------- --------- --------- --------- Net interest income after provision for estimated loan losses............... 4,151 1,864 2,200 1,183 797 --------- --------- --------- --------- --------- Non-interest income: Loan servicing and other fees..................... 413 321 496 231 164 Service charges on deposit accounts................. 94 93 128 111 84 Net gains from mortgage financing operations..... 17,413 3,759 8,352 3,575 1,428 Other income.............. 265 91 136 103 12 --------- --------- --------- --------- --------- Total non-interest income................. 18,185 4,264 9,112 4,020 1,688 --------- --------- --------- --------- --------- Non-interest expense: Compensation and benefits................. 5,534 3,206 5,233 2,544 1,575 Premises and occupancy.... 805 538 746 471 418 Data processing........... 524 281 390 208 167 Net loss on foreclosed real estate.............. 94 171 158 53 280 FDIC insurance premiums... 69 136 174 184 186 SAIF special assessment... -- 448 448 -- -- Marketing................. 195 119 189 65 55 Telephone................. 439 159 246 143 128 Professional services..... 243 137 218 92 86 Other expense............. 1,247 623 879 629 561 --------- --------- --------- --------- --------- Total non-interest expense................ 9,150 5,818 8,681 4,389 3,456 --------- --------- --------- --------- --------- Income (loss) before income tax provision (benefit).... 13,186 310 2,631 814 (971) Income tax provision (benefit).................. 5,491 142 1,126 294 (300) --------- --------- --------- --------- --------- Net income (loss)....... $ 7,695 $ 168 $ 1,505 $ 520 $ (671) ========= ========= ========= ========= ========= Earnings (loss) per share(1)................... $ 1.70 $ 0.08 $ 0.63 $ 0.28 $ (0.36) ========= ========= ========= ========= ========= Weighted average shares outstanding................ 4,522,251 2,090,466 2,370,779 1,866,216 1,866,216 ========= ========= ========= ========= =========
- -------- (1) Earnings per share is based on the weighted average shares outstanding during the period, adjusted for a 100% stock dividend which occurred during 1996. Earnings per share is then adjusted for the exchange of three shares of Company Common Stock for one share of Bank common stock in the Reorganization. 31 AVERAGE BALANCE SHEETS The following tables set forth certain information relating to the Company at September 30, 1997, and for the nine months ended September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Unless otherwise noted, average balances are measured on a daily basis. The yields and costs include fees which are considered adjustments to yields.
AT SEPTEMBER 30, NINE MONTHS ENDED NINE MONTHS ENDED 1997 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------- ---------------------------- --------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST -------- ---------- -------- -------- ---------- ------- -------- ---------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Interest-earning deposits and short- term investments...... $ 14,970 5.15% $ 16,065 $ 719 5.97% $ 4,651 $ 162 4.64% Investment securities(1)......... 8,056 5.85 8,901 376 5.63 2,227 85 5.09 Loans receivable, net(2)................ 223,688 10.23 143,487 10,001 9.29 69,944 4,674 8.91 Mortgage-backed securities(1)......... 9 7.50 9 -- -- 11 1 12.12 Residual assets........ 24,533 13.50 10,854 1,056 12.97 -- -- -- -------- -------- ------ ------- ------ Total interest-earning assets................ 271,256 10.11 179,316 12,152 9.04 76,833 4,922 8.54 ------ ------ Non-interest-earning assets(3).............. 22,846 23,049 6,200 -------- -------- ------- Total assets(3)........ $294,102 $202,365 $83,033 ======== ======== ======= LIABILITIES AND EQUITY: Interest-bearing liabilities: Passbook accounts...... $ 3,968 2.10 $ 4,027 63 2.09 $ 4,479 71 2.11 Money market accounts.. 3,794 2.99 2,978 67 3.00 3,939 90 3.05 Checking accounts...... 11,197 2.46 10,691 201 2.51 7,076 73 1.38 Certificate accounts... 140,881 5.95 116,035 5,109 5.87 54,811 2,273 5.53 -------- -------- ------ ------- ------ Total deposit accounts.............. 159,840 5.54 133,731 5,440 5.42 70,305 2,507 4.75 Borrowings............. 71,523 7.35 27,308 1,661 8.11 4,318 192 5.93 -------- -------- ------ ------- ------ Total interest-bearing liabilities........... 231,363 6.10 161,039 7,101 5.88 74,623 2,699 4.82 ------ ------ Non-interest-bearing liabilities(3)......... 13,262 18,139 3,195 -------- -------- ------- Total liabilities(3)... 244,625 179,178 77,818 Equity(3)............... 49,477 23,187 5,215 -------- -------- ------- Total liabilities and equity(3)............. $294,102 $202,365 $83,033 ======== ======== ======= Net interest income before provision for estimated loan losses.. $5,051 $2,223 ====== ====== Net interest rate spread(4).............. 4.01 3.16 3.72 Net interest margin(5).. 3.76 3.86 Ratio of interest- earning assets to interest-bearing liabilities............ 117.24 111.35 102.96
- -------- (1) Includes unamortized discounts and premiums. (2) Amount is net of deferred loan origination fees, unamortized discounts, premiums and allowance for estimated loan losses and includes loans held for sale and non-performing loans. See "Business--Lending Overview." (3) Average balances are measured on a month-end basis. (4) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average interest-earning assets. 32
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1996 1995 1994 ------------------------ ------------------------ ------------------------ AVERAGE AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST ------- -------- ------- ------- -------- ------- ------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Interest-earning deposits and short-term investments........... $ 5,618 $ 257 4.57% $ 4,225 $ 203 4.80% $ 3,736 $ 124 3.32% Investment securities(1)......... 1,912 100 5.23 3,458 188 5.44 3,763 169 4.49 Loans receivable, net(2)................ 72,556 6,542 9.02 65,521 5,433 8.29 65,566 4,530 6.91 Mortgage-backed securities(1)......... 11 1 9.09 12 1 8.33 14 1 7.14 Residual assets........ 199 29 14.57 -- -- -- -- -- -- ------- ------ ------- ------ ------- ------ Total interest- earning assets...... 80,296 6,929 8.63 73,216 5,825 7.96 73,079 4,824 6.60 ------ ------ ------ Non-interest-earning assets(3).............. 6,035 2,465 2,517 ------- ------- ------- Total assets(3)...... $86,331 $75,681 $75,596 ======= ======= ======= LIABILITIES AND EQUITY: Interest-bearing liabilities: Passbook accounts...... $ 4,401 92 2.09 $ 5,090 127 2.50 $ 7,048 157 2.23 Money market accounts.. 4,233 118 2.79 5,493 144 2.62 6,512 163 2.50 Checking accounts...... 7,048 112 1.59 6,434 92 1.43 6,180 95 1.54 Certificate accounts... 57,333 3,192 5.57 50,608 2,829 5.59 49,851 2,119 4.25 ------- ------ ------- ------ ------- ------ Total deposit accounts.............. 73,015 3,514 4.81 67,625 3,192 4.72 69,591 2,534 3.64 Borrowings(4).......... 4,268 252 5.90 3,112 256 8.23 1,863 187 10.04 ------- ------ ------- ------ ------- ------ Total interest- bearing liabilities......... 77,283 3,766 4.87 70,737 3,448 4.87 71,454 2,721 3.81 ------ ------ ------ Non-interest-bearing liabilities(3)......... 3,026 1,131 197 ------- ------- ------- Total liabilities(3). 80,309 71,868 71,651 Equity(3).............. 6,022 3,813 3,945 ------- ------- ------- Total liabilities and equity(3)....... $86,331 $75,681 $75,596 ======= ======= ======= Net interest income before provision for estimated loan losses................. $3,163 $2,377 $2,103 ====== ====== ====== Net interest rate spread(5).............. 3.76 3.09 2.79 Net interest margin(6).. 3.94 3.25 2.88 Ratio of interest- earning assets to interest-bearing liabilities............ 103.90 103.50 102.27
- -------- (1) Includes unamortized discounts and premiums. (2) Amount is net of deferred loan origination fees, unamortized discounts, premiums and allowance for estimated loan losses and includes loans held for sale and non-performing loans. See "Business--Lending Overview." (3) Average balances are measured on a month-end basis. (4) The average yield on borrowings for the years ending December 31, 1995 and 1994 included the effects of $52,000 and $96,000, respectively, in interest expense on swap transactions with a notional principal balance of $2.0 million in 1995 and 1994. Without this added expense, the average yield on borrowings for the years ending December 31, 1995 and 1994 would have been 6.56% and 4.88%, respectively. The yield on total interest- bearing liabilities for the years ending December 31, 1995 and 1994 would have been 4.80% and 3.67%, respectively. The $2.0 million in swap contracts matured on November 7, 1995. (5) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (6) Net interest margin represents net interest income divided by average interest-earning assets. 33 Rate/Volume Analysis. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
NINE MONTHS ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 COMPARED TO COMPARED TO COMPARED TO NINE MONTHS ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 ---------------------- ------------------- ------------------- INCREASE INCREASE INCREASE (DECREASE) (DECREASE) (DECREASE) DUE TO DUE TO DUE TO -------------- ----------- ----------- VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET ------ ------ ------ ------ ---- ------ ------ ---- ------ (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Interest-earning deposits and short- term investments...... $ 498 $ 59 $ 557 $ 64 $(10) $ 54 $ 18 $ 60 $ 78 Investment securities, net................... 281 10 291 (81) (7) (88) (14) 34 20 Loans receivable, net(1)................ 5,119 208 5,327 609 500 1,109 (2) 905 903 Residual assets........ -- 1,056 1,056 29 -- 29 -- -- -- Mortgage-backed securities............ -- (1) (1) -- -- -- -- -- -- ------ ------ ------ ---- ---- ------ ---- ---- ------ Total interest-earning assets................ 5,898 1,332 7,230 621 483 1,104 2 999 1,001 INTEREST-BEARING LIABILITIES: Money market accounts.. (21) (2) (23) (35) 9 (26) (27) 8 (19) Passbook accounts...... (7) (1) (8) (16) (19) (35) (47) 17 (30) Checking accounts...... 50 78 128 9 11 20 4 (7) (3) Certificate accounts... 2,688 148 2,836 374 (11) 363 33 677 710 Borrowings............. 1,374 95 1,469 80 (84) (4) 108 (39) 69 ------ ------ ------ ---- ---- ------ ---- ---- ------ Total interest-bearing liabilities........... 4,084 318 4,402 412 (94) 318 71 656 727 ------ ------ ------ ---- ---- ------ ---- ---- ------ Change in net interest income................. $1,814 $1,014 $2,828 $209 $577 $ 786 $(69) $343 $ 274 ====== ====== ====== ==== ==== ====== ==== ==== ======
- -------- (1) Includes interest on loans held for sale. SUMMARY The Company originates, purchases, sell, securitizes and services primarily non-conventional mortgage loans principally secured by first and second mortgages on one- to four-family residences. The Company makes Liberator Series loans, which are for the purchase or refinance of residential real property by sub-prime borrowers and Portfolio Series loans, which are debt consolidation loans for Agency-Qualified Borrowers with loan-to-value ratios of up to 135%. The Company has recently increased the permitted loan-to-value ratios on Portfolio Series loans to 135% from 125%. While the Company is currently emphasizing the origination of Portfolio Series loans, it intends to market both products as demand permits. In addition, to a much lesser extent, the Company originates multi-family residential and commercial loans. The Company purchases and originates mortgage loans and other real estate secured loans through a network of Originators throughout the country. The Company funds substantially all of the loans which it originates or purchases through deposits, other borrowings, internally generated funds and FHLB advances. In the immediate and foreseeable future, the Company will also fund loans from the cash proceeds, if any, received from securitizations. Deposit flows and cost of funds are influenced by prevailing market rates of interest primarily on competing investments, account maturities and the levels of savings in the Company's market area. The Company's ability to purchase or sell loans is influenced by the general level of product available from its correspondent relationships and the willingness of investors to purchase the loans at an acceptable price to the Company. Due to substantial activity in the purchase and sale of loans in recent years, the net gains from mortgage financing operations have been significant. The Company's 34 results of operations are also affected by the Company's provision for loan losses and the level of operating expenses. The Company's operating expenses primarily consist of employee compensation and benefits, premises and occupancy expenses, and other general expenses. The Company's results of operations are also affected by prevailing economic conditions, competition, government policies and actions of regulatory agencies. See "Regulation." COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 GENERAL For the nine months ended September 30, 1997 the Company recorded net income of $7.7 million compared to $168,000 for the nine months ended September 30, 1996. The net earnings per share for the nine months ended September 30, 1997 were $1.70 compared to $0.08 for the nine months ended September 30, 1996. The increase in net income was due to the expansion of the mortgage financing operations, the increase in gains with respect to such operations, increases in net interest income and the absence of a special SAIF assessment. INTEREST INCOME Interest income for the nine months ended September 30, 1997 was $12.2 million, compared to $4.9 million for the nine months ended September 30, 1996, due to an increase in the average balance of interest earning assets, combined with an increase in the yield on those assets. Average interest earning assets increased to $176.1 million for the nine months ended September 30, 1997 compared to $78.0 million for the nine months ended September 30, 1996. The yield on interest earning assets increased to 9.20% for the nine months ended September 30, 1997 compared to 8.41% for the nine months ended September 30, 1996. The largest single component of interest earning assets was average loans receivable, net, which were $140.9 million with a yield of 9.46% for the nine months ended September 30, 1997, compared to $71.2 million with a yield of 8.75% for the nine months ended September 30, 1996. INTEREST EXPENSE For the nine months ended September 30, 1997, interest expense was $7.1 million compared to $2.7 million for the nine months ended September 30, 1996 due to an increase in the average balance of interest bearing liabilities combined with an increase in the cost of those liabilities. At the end of the quarter ended March 31, 1997, the Company issued subordinated debentures with an interest rate of 13.5%. This issuance of debentures, combined with an increased use of borrowed funds as well as a heavier reliance on certificate accounts, resulted in an increase in the average cost of interest bearing liabilities to 5.88% for the nine months ended September 30, 1997 compared to 4.82% for the nine months ended September 30, 1996. Average interest bearing liabilities were $161.0 million for the nine months ended September 30, 1997 compared to $74.6 million for the nine months ended September 30, 1996. The largest component of average interest bearing liabilities was certificate accounts, which averaged $116.0 million with an average cost of 5.87% for the nine months ended September 30, 1997 compared to $54.8 million with an average cost of 5.53% for the nine months ended September 30, 1996. The second largest component of average interest bearing liabilities is borrowings, which increased to an average balance of $27.3 million with an average cost of 8.11% for the nine months ended September 30, 1997 compared to $4.3 million with an average cost of 5.93% for the nine months ended September 30, 1997. NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES Net interest income before provision for estimated loan losses for the nine months ended September 30, 1997 was $5.1 million compared to $2.2 million for the nine months ended September 30, 1996. This increase is the net effect of an increase in average interest earning assets and average interest bearing liabilities, as well as an increase in the net interest margin and the ratio of interest earning assets to interest bearing liabilities. Average interest earning assets increased to $176.1 million for the nine months ended September 30, 1997 compared to 35 $78.0 million for the nine months ended September 30, 1996. Average interest bearing liabilities increased to $161.0 million with an average cost of 5.88% for the nine months ended September 30, 1997 compared to $74.6 million with an average cost of 4.82% for the nine months ended September 30, 1996. The net interest margin was 3.83% for the nine months ended September 30, 1997 compared to 3.80% for the nine months ended September 30, 1996. The ratio of interest earning assets to interest bearing liabilities was 109.33% for the nine months ended September 30, 1997 compared to 104.59% for the nine months ended September 30, 1996. PROVISION FOR ESTIMATED LOAN LOSSES Provisions for estimated loan losses were $900,000 for the nine months ended September 30, 1997 compared to $359,000 for the nine months ended September 30, 1996. The increase in provisions was based on an evaluation of the composition of the Company's loan portfolio. Charge-offs for the nine months ended September 30, 1997 were $673,000, with recoveries for the same period of $7,000, leaving the Company with net charge offs of $666,000 for the period. Charge-offs for the nine months ended September 30, 1996 were $632,000. While management believes it has adequately provided for losses and does not expect any material loss on its loans in excess of allowances already recorded, no assurance can be given that additional loans will not become delinquent or that the collateral for such loans will be sufficient to prevent losses in the event of foreclosure. Management believes that the allowance for loan losses at September 30, 1997 was adequate to absorb known and inherent risks in the Company's loan portfolio. No assurance can be given, however, that economic conditions which may adversely affect the Company's or the Bank's service areas or other circumstances will not be reflected in increased losses in the loan portfolio. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance or to take charge-offs (reductions in the allowance) in anticipation of losses. See "Business--Lending Overview--Delinquencies and Classified Assets" and "-- Lending Overview--Allowance for Loan Losses." NON-INTEREST INCOME For the nine months ended September 30, 1997, net gains from mortgage financing operations totaled $17.4 million compared to $3.8 million for the nine months ended September 30, 1996. The net gain includes a pre-tax unrealized loss of $787,000, due to an adjustment to the valuation of the residual asset related to the 1997-1A securitization, as a result of higher- than-estimated prepayment speeds. See "Business--Loan Sales and Asset Securitizations." This increase was attributable to the increase in the level of mortgage financing operations, with loans sold or securitized totaling $277.1 million (including $73.1 million in whole loans sales) during the nine months ended September 30, 1997, compared to loans sold totaling $140.8 million for the nine months ended September 30, 1996. There were no loans securitized during the nine months ended September 30, 1996. Net gains from mortgage financing operations as a percent of loans sold and securitized was 6.28% for the nine months ended September 30, 1997 compared to 2.67% for the nine months ended September 30, 1996. This increase in percentage reflected the effects of the securitization of loans compared to whole loan sales. Loans originated and purchased totaled $433.4 million for the nine months ended September 30, 1997 compared to $148.4 million for the nine months ended September 30, 1996. NON-INTEREST EXPENSE For the nine months ended September 30, 1997, non-interest expense was $9.2 million compared to $5.8 million for the nine months ended September 30, 1996. The increase was due primarily to an increase in compensation and benefits and other operating expenses resulting from the expansion of the mortgage financing operations. New loans originated and purchased were $433.4 million for the nine months ended September 30, 1997 compared to $148.4 million for the nine months ended September 30, 1996. For the nine months ended September 30, 1997, compensation and benefits were $5.5 million compared to $3.2 million for the nine months ended September 30, 1996. These costs are directly related to the expansion of 36 the mortgage financing operations and the corresponding increase in personnel, to an average of 163 employees for the nine months ended September 30, 1997 compared to 87 for the nine months ended September 30, 1996. Premises and occupancy expenses were $805,000 for the nine months ended September 30, 1997 compared to $538,000 for the nine months ended September 30, 1996 due to the expansion of the mortgage financing operation and the addition of the regional operating center in the Denver, Colorado metropolitan operating area, as well as the opening of the new corporate headquarters in Riverside, California. As a result of leasing office space for the Company's and the Bank's executive offices and the western regional office of Life Financial Services, combined with the relocation of the Florida regional office, the addition of two new retail lending offices in California and the anticipated leasing of space for an additional four retail lending offices during the quarter ending December 31, 1997 and two retail lending offices during the first quarter of 1998, premises and occupancy expenses are expected to increase to approximately $594,000 per quarter beginning with the first quarter of 1998. As a result of the expansion of the mortgage financing operations, other operating expenses increased as well. Data processing increased to $524,000 for the nine months ended September 30, 1997 compared to $281,000 for the nine months ended September 30, 1996. The increase in non-interest expense was partially offset by a reduction in FDIC insurance premiums in the 1997 period. During the quarter ended September 30, 1996, the Bank paid a one time assessment to the FDIC of $448,000 for the recapitalization of the SAIF. Telephone, professional services and other expense were $439,000, $243,000 and $1,247,000 for the nine months ended September 30, 1997 compared to $159,000, $137,000 and $623,000 for the nine months ended September 30, 1996. INCOME TAXES The provision for income taxes increased to $5.5 million for the nine months ended September 30, 1997 compared to $142,000 for the nine months ended September 30, 1996. Income before income tax provision increased to $13.2 million for the nine months ended September 30, 1997 compared to $310,000 for the nine months ended September 30, 1996. The effective tax rate decreased to 41.6% for the nine months ended September 30, 1997 compared to 45.8% for the nine months ended September 30, 1997. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 Total assets increased to $294.1 million as of September 30, 1997 compared to $104.0 million as of December 31, 1996 due to the expansion of the mortgage financing operations. Loans held for sale totaled $191.6 million as of September 30, 1997 compared to $31.0 million as of December 31, 1996. This increase was partially offset by a decrease in loans held for investment to $32.1 million as of September 30, 1997 compared to $36.9 million as of December 31, 1996. During the nine months ended September 30, 1997, the Company originated or purchased $433.4 million of loans. During the same nine month period, the Company sold or securitized $277.1 million of loans (including $73.1 million in whole loan sales). The increase in loans held for sale also resulted in an increase in accrued interest receivable to $1.7 million as of September 30, 1997 compared to $537,000 as of December 31, 1996. As a result of the Company's loan securitization activities, residual assets and restricted cash increased to $24.5 million and $10.9 million, respectively, as of September 30, 1997 compared to $5.7 million and $1.6 million as of December 31, 1996. Mortgage servicing rights also increased to $5.7 million as of September 30, 1997 compared to $2.6 million as of December 31, 1996 as a result of the securitization of loans with servicing retained. Cash and cash equivalents were $12.9 million as of September 30, 1997 compared to $13.3 million as of December 31, 1996. During the nine months ended September 30, 1997, the Company began leasehold improvements on the new corporate headquarters as well as adding the Denver, Colorado regional lending center, increasing premises and equipment to $3.8 million as of September 30, 1997 compared to $1.6 million as of 37 December 31, 1996. Real estate owned increased to $975,000 as of September 30, 1997 compared to $561,000 as of December 31, 1996 as part of the Company's continuing effort to resolve problem loans. During the nine months ended September 30, 1997, the Company issued $10.0 million in Subordinated Debentures in order to increase its risk based capital. The additional funds, net of debt issuance costs, were used to fund loans during the nine months ended September 30, 1997. In addition, the Company increased its liabilities by increasing deposit accounts to $159.8 million as of September 30, 1997 compared to $85.7 million as of December 31, 1996. The major component of deposit accounts is certificates of deposit, which increased to $140.9 million as of September 30, 1997 compared to $69.4 million as of December 31, 1996. The additional funds were used to fund loans during the nine months ended September 30, 1997. The Company also increased its use of FHLB advances and other borrowings to fund loans held for sale. The Company has added two warehouse lines of credit with a combined credit limit of $250.0 million. The availability of such borrowings permits the Company to access sufficient cash to originate and hold loans pending securitization or sale and to thereafter repay the lines of credit following securitization or sale of the loans. FHLB advances and other borrowings increased to $61.5 million as of September 30, 1997 compared to $3.3 million as of December 31, 1996. The warehouse lines of credit have a total aggregate limit of $250.0 million, and range in interest rates from LIBOR plus 50 basis points to LIBOR plus 100 basis points. Accounts payable and other liabilities increased to $13.3 million as of September 30, 1997 compared to $5.7 million as of December 31, 1996 due to an increase in loans serviced for other investors and the corresponding increase in amounts due investors between the time the borrowers make payments to the Company and the time the Company remits payments to the investors. Stockholders' equity increased to $49.5 million as of September 30, 1997 from $9.3 million as of December 31, 1996 due to the issuance of 2,900,000 shares of Company common stock to the public in the Company's initial public offering, completed on June 30, 1997 and the issuance of an additional 435,000 shares to the public pursuant to the exercise of the underwriter's overallotment option. The initial offering price to the public was $11.00 per share, which resulted in $32.5 million in net proceeds after expenses. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 GENERAL Net income increased by $985,000 from $520,000 for the year ended December 31, 1995 to $1.5 million for the year ended December 31, 1996. Net income for the year ended December 31, 1996 was adversely impacted by a non-recurring expense for compensation and benefits of $354,000 which was incurred during the quarter ended June 30, 1996, and a non-recurring SAIF special assessment of $448,000 which was incurred during the quarter ended September 30, 1996. The non-recurring expense for compensation and benefits is an accrual of the present value of a portion of the future payments due pursuant to a consulting agreement entered into with a former officer of the Bank. See "The Board of Directors and Management of the Bank--Consultation Agreement." Net income for the year ended December 31, 1996 would have been $2.0 million if these charges had not been incurred. Net gains from mortgage financing operations for the year ended December 31, 1995 totaled $3.6 million compared to $8.4 million for the year ended December 31, 1996 due to the expansion of the mortgage financing operations and increased marketing effort therefrom, along with the completion of the Bank's first securitization during the quarter ended December 31, 1996. The expansion of the mortgage financing operations resulted in an increase in loan originations and purchases from $134.8 million for the year ended December 31, 1995 to $222.6 million for the year ended December 31, 1996. The related sales of loans increased from $126.9 million for the year ended December 31, 1995 to $206.6 million (including $51.9 million sold through the fourth quarter securitization) for the year ended December 31, 1996. As a result of this securitization, the Bank recognized a gain on sale of $4.3 million. See "Business--Loan Sales and Asset Securitizations." 38 The Company currently intends to conduct securitizations on a regular basis either through private placements or public offerings. There can be no assurance, however, that the Company will be able to successfully implement this strategy. See "Risk Factors Related to the Company--Dependence on Asset Securitizations and Impact on Quarterly Operating Results." In addition, during the year ended December 31, 1996, the Bank acquired the Riverside, California property it had been leasing by exercising its lease option at a price of $375,000. The Bank also increased its personnel from an average of 50 for the year ended December 31, 1995 to an average of 97 for the year ended December 31, 1996. The additional staff allowed for increased marketing, processing and underwriting efforts and the ability to increase the number of broker and correspondent relationships, but also added to non- interest expense for the period. INTEREST INCOME Interest income increased from $5.8 million for the year ended December 31, 1995 to $6.9 million for the year ended December 31, 1996, due to an increase in the yield on interest-earning assets as well as in the average balances of those assets. The Bank's yield on average interest-earning assets increased from 7.96% for the year ended December 31, 1995 to 8.63% for the year ended December 31, 1996. Total average interest-earning assets increased from $73.2 million for the year ended December 31, 1995 to $80.3 million for the year ended December 31, 1996. The largest single component of interest-earning assets was loans receivable, net, which increased from an average of $65.5 million for the year ended December 31, 1995 to $72.6 million for the year ended December 31, 1996. The increase in average loans receivable, net was due to an increase in loans held for sale from the expansion of the mortgage financing operations. Loans held for sale increased from $21.7 million at December 31, 1995 to $31.0 million at December 31, 1996, while loans held for investment, net decreased from $41.7 million at December 31, 1995 to $36.9 million at December 31, 1996. Generally, all loans are originated or purchased for sale in the secondary market or through securitizations. See "Business-- Core Lending Products" and "--Loan Sales and Asset Securitizations." The yield on loans receivable increased from 8.29% for the year ended December 31, 1995 to 9.02% for the year ended December 31, 1996. INTEREST EXPENSE Interest expense increased from $3.4 million for the year ended December 31, 1995 to $3.8 million for the year ended December 31, 1996 due to an increase in average interest-bearing liabilities. Average interest-bearing liabilities increased from $70.7 million for the year ended December 31, 1995 to $77.3 million for the year ended December 31, 1996. Interest expense for the year ended December 31, 1995 was adversely impacted by the effects of an interest rate swap which matured on November 7, 1995 which resulted in an increase in interest expense on borrowings of $52,000 for the year ended December 31, 1995. Without this expense, average cost of borrowings for the year ended December 31, 1995 would have been 6.56%, and the average cost of total interest-bearing liabilities would have been 4.80%. The increase in interest expense also reflects a change in the composition of interest-bearing liabilities. Average certificate accounts increased from $50.6 million for the year ended December 31, 1995 to $57.3 million for the year ended December 31, 1996. Average borrowings increased from $3.1 million for the year ended December 31, 1995 to $4.3 million for the year ended December 31, 1996. NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES Net interest income before provision for estimated loan losses for the year ended December 31, 1995 was $2.4 million compared to $3.2 million for the year ended December 31, 1996. This increase was primarily due to the increase in the net interest margin from 3.25% for the year ended December 31, 1995 to 3.94% for the year ended December 31, 1996, and an increase in the ratio of average interest-earning assets to average interest-bearing liabilities from 103.50% for the year ended December 31, 1995 to 103.90% for the year ended December 31, 1996. 39 PROVISION FOR ESTIMATED LOAN LOSSES The provision for estimated loan losses was $963,000 for the year ended December 31, 1996 compared to $1.2 million for the year ended December 31, 1995. The decrease in the provision resulted from the Bank's quarterly analysis of its loan portfolio, the decrease in charge-offs of loans and the increase in recoveries and management's belief that property values in the southern California market had stopped deteriorating. Charge-offs for the year ended December 31, 1995 were $914,000 compared to $734,000 for the year ended December 31, 1996. For the year ended December 31, 1995, the ratio of net charge-offs to average loans outstanding was 1.30% compared to 0.71% for the year ended December 31, 1996. Recoveries increased from $65,000 for the year ended December 31, 1995 to $219,000 for the year ended December 31, 1996. Non-performing assets as a percent of total assets decreased from 3.0% at December 31, 1995 to 2.86% at December 31, 1996. At December 31, 1995 the allowance for estimated loan losses was $1.2 million compared to $1.6 million at December 31, 1996. The allowance for estimated loan losses as a percent of non-performing loans was 84.25% at December 31, 1995 compared to 67.26% at December 31, 1996. NON-INTEREST INCOME Gains from mortgage financing operations for the year ended December 31, 1995 were $3.6 million compared to $8.4 million for the year ended December 31, 1996. This increase was attributable to the increase in the level of mortgage financing operations, with loans sold totaling $126.9 million for the year ended December 31, 1995 compared to $206.6 million (including $51.9 million sold through the securitization completed in the quarter ended December 31, 1996) for the year ended December 31, 1996. Loans originated and purchased totalled $134.8 million for the year ended December 31, 1995 compared to $222.6 million for the year ended December 31, 1996, which also resulted in an increase in loan servicing and other fees from $231,000 for the year ended December 31, 1995 to $496,000 for the year ended December 31, 1996. Gains from mortgage financing operations as a percent of loans sold and securitized increased from 2.82% for the year ended December 31, 1995 to 4.04% for the year ended December 31, 1996. This increase is a direct result of the Bank's securitization during the quarter ended December 31, 1996. As a result of this securitization, the Bank generated a gain on sale of $4.3 million. Consistent with management's business strategy, it is anticipated that mortgage financing operations will constitute an even greater portion of the Company's business in future periods. The inability of the Company to implement its business strategy would have a material adverse effect on the Company's financial condition and results of operations. See "Risk Factors Related to the Company--Ability of the Bank to Implement its Business Strategy" and "Business--Background of the Company" and "--Growth and Operating Strategies." NON-INTEREST EXPENSE Non-interest expense was $4.4 million for the year ended December 31, 1995 compared to $8.7 million for the year ended December 31, 1996. The increase was due primarily to the expansion of the mortgage financing operations, a non-recurring increase in compensation and benefits and the non-recurring SAIF special assessment. New loans originated and purchased increased from $134.8 million for the year ended December 31, 1995 to $222.6 million for the year ended December 31, 1996, which resulted in increased employee commissions and bonuses. Compensation and benefits increased from $2.5 million for the year ended December 31, 1995 to $5.2 million for the year ended December 31, 1996. These costs are directly related to the expansion of the mortgage financing operations and the corresponding increase in personnel, from an average of 50 for the year ended December 31, 1995 to 97 for the year ended December 31, 1996, combined with a non-recurring expense for compensation and benefits of $354,000 during the quarter ended June 30, 1996. The non-recurring expense for compensation and benefits is an accrual of the present value of a portion of the future payments due pursuant to a consulting agreement entered into with a former officer of the Bank. See "The Board of Directors and Management of the Bank--Consultation Agreement." 40 Premises and occupancy increased from $471,000 for the year ended December 31, 1995 to $746,000 for the year ended December 31, 1996 due to the addition of the Riverside, California mortgage financing office. The financing office is approximately 7,500 square feet, with additional space being utilized for the increase in personnel and the expansion of the mortgage financing operations. With the increase in loans originated and purchased, combined with the increase in personnel, data processing expense increased from $208,000 for the year ended December 31, 1995 to $390,000 for the year ended December 31, 1996. As a result of the expansion of the mortgage financing operations, marketing expense increased from $65,000 for the year ended December 31, 1995 to $189,000 for the year ended December 31, 1996. In addition, telephone expense increased from $143,000 for the year ended December 31, 1995 to $246,000 for the year ended December 31, 1996, and professional services increased from $92,000 for the year ended December 31, 1995 to $218,000 for the year ended December 31, 1996. The Bank incurred a charge of $448,000 due to the non-recurring SAIF special assessment during the year ended December 31, 1996. No similar charge was assessed for the year ended December 31, 1995. In addition, other expenses also increased due to the expansion of the mortgage financing operations, although no single item exceeded 1.0% of gross income. INCOME TAXES The provision for income taxes increased from $294,000 for the year ended December 31, 1995 to $1.1 million for the year ended December 31, 1996. The increase in income taxes is the result of the increase in income before tax, which increased from $814,000 for the year ended December 31, 1995 to $2.6 million for the year ended December 31, 1996. The effective tax rate increased from 36.1% for the year ended December 31, 1995 to 42.8% for the year ended December 31, 1996. The change in effective tax rate is due to a reduction in the deferred tax valuation allowance for state tax purposes in 1995. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995 Total assets increased from $74.1 million as of December 31, 1995 to $104.0 million as of December 31, 1996, which was attributable to an increase in loans held for sale, an increase in cash and cash equivalents, an increase in securities held-to-maturity and FHLB stock and an investment in residuals and restricted cash created as a result of the securitization completed in the quarter ended December 31, 1996. Loans held for sale, net, increased from $21.7 million as of December 31, 1995 to $31.0 million as of December 31, 1996, which was partially offset by a decrease in loans held for investment from $41.7 million as of December 31, 1995 to $36.9 million as of December 31, 1996. During the year ended December 31, 1996, the Bank originated and purchased $222.6 million in loans, which were offset by prepayments, sales and securitizations totaling $206.6 million. Cash and cash equivalents were $3.9 million at December 31, 1995, compared to $13.3 million at December 31, 1996 due to an increase in deposits from $67.5 million at December 31, 1995 to $85.7 million at December 31, 1996. Securities held-to-maturity and FHLB stock increased from $2.7 million at December 31, 1995 to $8.8 million at December 31, 1996. Securities held-to-maturity consist of U.S. Treasury bills and U.S. Treasury notes with staggered maturities ranging from three months to 24 months. During the quarter ended December 31, 1996, the Bank securitized $51.9 million in loans. This was the first loan securitization completed by the Bank, which recorded a gain on sale of $4.3 million. Deposit accounts increased from $67.5 million as of December 31, 1995 to $85.7 million as of December 31, 1996 due to an increased use of wholesale deposits to fund lending activity. While core deposits remained fairly stable, certificates of deposits increased from $51.8 million at December 31, 1995 to $69.4 million at December 31, 1996. Stockholders' equity increased from $4.3 million at December 31, 1995 to $9.3 million at December 31, 1996 due to net income of $1.5 million for the year ended December 31, 1996 and due to proceeds from the issuance of common stock in the Private Placement during the third quarter of 1996 totaling $3.5 million. 41 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 GENERAL The Bank reported net income of $520,000 for the year ended December 31, 1995, which represented a $1.2 million increase from the net loss of $671,000 for the year ended December 31, 1994. The increase in net income for the year ended December 31, 1995 compared to the year ended December 31, 1994 was attributable to the increase in mortgage financing operations and an increase in net interest income. Loans originated and purchased totalled $134.8 million for the year ended December 31, 1995 compared to $72.8 million for the year ended December 31, 1994. The increase in loans originated and purchased is due to the restructuring and expansion of the mortgage financing operations during 1994 and 1995. During 1994, the Bank hired new management to restructure the mortgage financing operations, changing the lending strategy from traditional mortgage banking and portfolio lending to focusing on sub-prime mortgage financing. During the period of restructuring in the first half of 1994, loan originations and purchases declined as new lending products were being developed and new personnel skilled in originating, processing underwriting and servicing the new products were being hired. Loan originations and purchases increased during the latter half of 1994 and 1995 as a result of the restructuring. Gains from mortgage financing operations were $3.6 million for the year ended December 31, 1995 compared to $1.4 million for the year ended December 31, 1994 due to the expansion of the mortgage financing operations and the increase in sales of loans which were generated as a result of this expansion. Loan sales were $126.9 million for the year ended December 31, 1995 compared to $65.7 million for the year ended December 31, 1994. In addition, based on the change in the loans generated and therefore the change in the market demand for these loans, gains on sale as a percentage of loans sold increased from 2.17% for the year ended December 31, 1994 to 2.82% for the year ended December 31, 1995. In addition, interest income increased due to the types of loans being generated. Net interest income before provision for estimated loan losses for the year ended December 31, 1995 was $2.4 million compared to $2.1 million for the year ended December 31, 1994. The Bank's net interest margin increased to 3.25% for the year ended December 31, 1995 compared to 2.88% for the year ended December 31, 1994. The Bank's yield on loans receivable, the single largest component of interest-earning assets, increased from 6.91% for the year ending December 31, 1994 to 8.29% for the year ending December 31, 1995. As a result of these events, the Bank's return on average assets and return on average equity increased to 0.69% and 13.64%, respectively, for the year ended December 31, 1995, compared to (0.89%) and (17.01%), respectively, for the year ended December 31, 1994. INTEREST INCOME Interest income increased from $4.8 million for the year ended December 31, 1994 to $5.8 million for the year ended December 31, 1995 due to an increase in the yield on interest earning assets as well as the average balances of those assets. The Bank's yield on average interest earning assets increased to 7.96% for the year ended December 31, 1995 compared to 6.60% for the year ended December 31, 1994 due to the increase in loans held for sale from $17.1 million at December 31, 1994 to $21.7 million at December 31, 1995 as compared to loans held for investment which decreased from $47.1 million at December 31, 1994 to $41.7 million at December 31, 1995. The total average interest earning assets increased from $73.1 million for the year ended December 31, 1994 to $73.2 million for the year ended December 31, 1995. The largest single component of interest-earning assets was loans receivable, net. The yield on loans receivable increased from 6.91% for the year ended December 31, 1994 to 8.29% for the year ended December 31, 1995. Except for loans specifically originated to be held for investment, all loans are originated or purchased for sale in the secondary market or through securitizations. 42 INTEREST EXPENSE Interest expense increased from $2.7 million for the year ended December 31, 1994 to $3.4 million for the year ended December 31, 1995. Total average interest-bearing liabilities decreased from $71.5 million with an average yield of 3.81% for the year ended December 31, 1994 to $70.7 million with an average cost of 4.87% for the year ended December 31, 1995. The cost of certificate accounts increased from 4.25% for the year ended December 31, 1994 to 5.59% for the year ended December 31, 1995. The level of certificate accounts averaged $50.6 million for the year ended December 31, 1995 compared to $49.9 million for the year ended December 31, 1994. The interest expense increase also reflects the rise in average borrowings, which were $3.1 million for the year ended December 31, 1995, compared to $1.9 million for the year ended December 31, 1994. The cost of borrowings was adversely affected by interest rate swaps which matured on November 7, 1995. During the years ended December 31, 1995 and December 31, 1994, the interest on swaps totalled $52,000 and $96,000, respectively, which increased the cost of borrowings for the years ended December 31, 1995 and December 31, 1994 to 8.23% and 10.04%, respectively. Without the interest on the swaps, the cost of borrowings would have been 6.56% for the year ended December 31, 1995 and 4.88% for the year ended December 31, 1994. Furthermore, the cost of total interest-bearing liabilities for the years ended December 31, 1995 and December 31, 1994 would have been 4.80% and 3.67% without the interest on the swaps. NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES Net interest income before provision for estimated loan losses for the year ended December 31, 1995 was $2.4 million compared to $2.1 million for the year ended December 31, 1994. The Bank's net interest margin increased to 3.25% for the year ended December 31, 1995 compared to 2.88% for the year ended December 31, 1994. Average interest-earning assets to interest-bearing liabilities increased from 102.27% at December 31, 1994 to 103.50% at December 31, 1995. PROVISION FOR ESTIMATED LOAN LOSSES The provision for estimated loan losses was $1.2 million for the year ended December 31, 1995 compared to $1.3 million for the year ended December 31, 1994. The decrease in the provision resulted from the Bank's analysis of its loan portfolio and an increase in the recoveries of the loans previously charged off. Recoveries for the year ended December 31, 1995 were $65,000 compared to $3,000 for the year ended December 31, 1994. Charge-offs for the 1995 and 1994 periods remained relatively constant as management continued to charge-off problem assets and improve its collection procedures pursuant to its strategy which was revised during the year ended December 31, 1994. See "Business--Background of the Bank." Charge-offs net of recoveries, however, totalled $849,000 for the year ended December 31, 1995 exceeding the Bank's allowance for estimated loan losses of $832,000 established at December 31, 1994, which reflected management's loss expectation for the year ended December 31, 1995. Non-performing assets as a percent of total assets declined from 3.42% at December 31, 1994 to 3.00% at December 31, 1995. The Bank's allowance for estimated loan losses increased from $832,000 at December 31, 1994 to $1.2 million at December 31, 1995. The allowance for estimated loan losses as a percent of non-performing loans increased to 84.25% at December 31, 1995 compared to 44.04% at December 31, 1994. NON-INTEREST INCOME Gains from mortgage financing operations for the year ended December 31, 1995 were $3.6 million compared to $1.4 million for the year ended December 31, 1994. This increase was attributable to the increase in the level of mortgage financing operations, with loans sold totaling $126.9 million for the year ended December 31, 1995 compared to $65.7 million for the year ended December 31, 1994. Loans originated and purchased totaled $134.8 million for the year ended December 31, 1995 compared to $72.8 million for the year ended December 31, 1994. During 1994, the Bank hired new management to restructure the mortgage financing operations, changing the lending strategy from a traditional mortgage banking and portfolio lending operation to 43 a strategy of a sub-prime mortgage financing operations. During the period of restructuring in the first six months of 1994, loan originations and purchases declined as new lending products were being developed and new personnel skilled in originating, processing, underwriting and servicing the new products were being hired. Loan originations and purchases increased during the latter half of 1994 and 1995 as a result of the restructuring. Loan servicing and other fees were $231,000 for the year ended December 31, 1995 compared to $164,000 for the year ended December 31, 1994 due to the expansion of the mortgage financing operations and the increase in the loan servicing portfolio. With the adoption of SFAS No. 122 in July of 1995, the Bank retained a greater portion of its servicing, which resulted in an increase in servicing for other investors from $48.2 million as of December 31, 1994 to $189.5 million as of December 31, 1995. See "--Impact of New Accounting Standards." NON-INTEREST EXPENSE Total non-interest expense totalled $4.4 million for the year ended December 31, 1995 compared to $3.5 million for the year ended December 31, 1994. This increase is primarily attributable to the expenses related to compensation and benefits increasing from $1.6 million for the year ended December 31, 1994 to $2.5 million for the year ended December 31, 1995. These costs are directly related to the expansion of the mortgage financing operations and the corresponding increase in personnel. Loans originated and purchased increased from $72.8 million for the year ended December 31, 1994 to $134.8 million for the year ended December 31, 1995, which resulted in increased employee commissions. Premises and occupancy, data processing and other expense increased as a result of the addition of the Riverside loan center in November 1995 and the increased loan activity during the year ended December 31, 1995 compared to the year ended December 31, 1994. INCOME TAXES The provision for income taxes increased from a benefit of $300,000 for the year ended December 31, 1994 to an expense of $294,000 for the year ended December 31, 1995. This increase is a result of income before income taxes of $814,000 for the year ended December 31, 1995 compared to a loss before income taxes of $971,000 for the year ended December 31, 1994 and the resulting increase in the Bank's effective rate from 30.9% to 36.1% for the year ended December 31, 1995. MANAGEMENT OF INTEREST RATE RISK The principal objective of the Company's interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the level of appropriate risk given the Company's business focus, operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with Board approved guidelines through the establishment of prudent asset concentration guidelines. Through such management, management of the Company seeks to reduce the vulnerability of the Company's operations to changes in interest rates. Management of the Company monitors its interest rate risk as such risk relates to its operational strategies. The Company's Board of Directors reviews on a quarterly basis the Company's asset/liability position, including simulations of the effect on the Company's capital of various interest rate scenarios. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Company. Between the time the Company originates loans and purchase commitments are issued, the Company is exposed to both upward and downward movements in interest rates which may have a material adverse effect on the Company. The Board of Directors of the Company recently implemented a hedge management policy primarily for the purpose of hedging the risks associated with loans held for sale in the Company's mortgage pipeline. In a flat or rising interest rate environment, this policy enables management to utilize mandatory forward commitments to sell fixed rate assets as the primary hedging vehicles to shorten the maturity of such assets. In a declining interest rate environment, the policy enables management to utilize put options. The hedge 44 management policy also permits management to extend the maturity of its liabilities through the use of short financial futures positions, purchase of put options, interest rate caps or collars, and entering into "long" interest rate swap agreements. Management may also utilize "short" interest rate swaps to shorten the maturity of long-term liabilities when the net cost of funds raised by using such a strategy is attractive, relative to short-term CD's or borrowings. Since this policy was implemented after March 31, 1997, the Company has engaged in only a limited amount of hedging activities. Management is continuing to evaluate and refine its hedging policies. No hedging positions were outstanding at September 30, 1997. See "Risk Factors Related to the Company--Risks Associated with Mortgage Origination, Purchase and Sales Activities." Net Portfolio Value. The Bank's interest rate sensitivity is monitored by management through the use of a model which estimates the change in net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The sensitivity measure is the decline in the NPV Ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline (the "Sensitivity Measure"). The higher an institution's Sensitivity Measure is, the greater its exposure to interest rate risk is considered to be. The Bank utilizes a market value model prepared by the OTS (the "OTS NPV model"), which is prepared quarterly, based on the Bank's quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model measures the Bank's interest rate risk by approximating the Bank's NPV, which is the net present value of expected cash flows from assets, liabilities and any off-balance sheet contracts, under various market interest rate scenarios which range from a 400 basis point increase to a 400 basis point decrease in market interest rates. The interest rate risk policy of the Bank provides that the maximum permissible change at a 400 basis point increase or decrease in market interest rates is a 45% change in the net portfolio value. The OTS has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, an institution whose Sensitivity Measure in the event of a 200 basis point increase or decrease in interest rates exceeds 2% would be required to deduct an interest rate risk component in calculating its total capital for purpose of the risk-based capital requirement. See "Regulation--Federal Savings Institution Regulation." As of September 30, 1997, the most recent date for which the relevant data is available, the Bank's Sensitivity Measure, as measured by the OTS, resulting from a 200 basis point increase in interest rates was 116 basis points and would result in a $3.7 million reduction in the NPV of the Bank. As of September 30, 1997, the Bank's Sensitivity Measure is below the threshold at which the Bank could be required to hold additional risk-based capital under OTS regulations. The OTS has postponed indefinitely the date the component will first be deducted from an institution's total capital. See "Regulation--Federal Savings Institution Regulation." Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV requires the making of certain assumptions that may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the models assume that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the models assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the impact of the Bank's business or strategic plans on the structure of interest-earning assets and interest- bearing liabilities. In particular, the Bank's core products and residual assets which are directly related to the Bank's core products do not behave in a manner which the OTS model projects. Borrowers of Portfolio Series loans are less likely to refinance or prepay such loans because of the high cost of obtaining a high loan to value loan. In addition, management believes that borrowers of Liberator Series loans are less likely to refinance or prepay such loans because of their lack of an adequate credit rating or possible prior credit problems. Accordingly, although the NPV measurement provides an indication of the Bank's interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income and will differ from actual results. The results of this modeling are monitored by management and presented to the Board of Directors, quarterly. 45 The following table shows the NPV and projected change in the NPV of the Bank at September 30, 1997 assuming an instantaneous and sustained change in market interest rates of 100, 200, 300 and 400 basis points ("bp"). INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
NPV AS % OF PORTFOLIO NET PORTFOLIO VALUE VALUE OF ASSETS --------------------------- ----------------------- CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE (bp) - --------------- -------- -------- -------- --------- ------------- (DOLLARS IN THOUSANDS) +400 bp..................... $14,614 (11,567) (44)% 5.75% (394) +300 bp..................... 18,941 (7,240) (28) 7.30 (239) +200 bp..................... 22,520 (3,662) (14) 8.53 (116) +100 bp..................... 24,895 (1,286) (5) 9.30 (39) Static...................... 26,181 9.68 -100 bp..................... 27,659 1,478 6 10.13 44 -200 bp..................... 30,308 4,127 16 10.94 125 -300 bp..................... 34,034 7,853 30 12.06 238 -400 bp..................... 38,448 12,267 47 13.35 367
LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, FHLB advances, other borrowings, principal and interest payments on loans, cash proceeds from the sale of loans and securitizations, and to a lesser extent, interest payments on investment securities and proceeds from the maturation of investment securities. See "Risk Factors Related to the Company--Availability of Funding Sources." While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. However, the Bank has continued to maintain the required minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio is currently 4%. The Bank's average liquidity ratios were 8.5%, 9.4% and 8.9% for the years ended December 31, 1996, 1995 and 1994, respectively, and 11.3% and 7.8% for the nine months ended September 30, 1997 and 1996, respectively. Management currently attempts to maintain a minimum liquidity ratio of 5.0%. The Company's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows used in operating activities were $184.5 million and $10.3 million for the nine months ended September 30, 1997 and 1996, respectively, and were $18.7 million, $5.3 million and $6.9 million for the years ended December 31, 1996, 1995 and 1994, respectively. Such cash flows primarily consisted of loans originated and purchased for sale (net of loan fees) of $450.1 million, $151.2 million, $227.2 million, $135.6 million and $72.6 million, net of proceeds from the sale and securitization of loans held for sale of $277.6 million, $143.0 million, $212.2 million, $130.1 million and $66.4 million for the nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided by investing activities consisted primarily of investment purchases offset by principal collections on loans and proceeds from maturation of investment purchases. Proceeds from the maturation of investment securities were $3.0 million and $2.0 million for the nine months ended September 30, 1997 and 1996, respectively, and $2.0 million, $9.2 million and $2.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided by (used in) financing activities consisted primarily of net activity in deposit accounts and borrowings. The net increase (decrease) in deposits and borrowings was $132.4 million and $5.8 million for the nine months ended September 30, 1997 and 1996, respectively, and $18.2 million, $596,000 and $(6.3) million for the years ended December 31, 1996, 1995 and 1994, respectively. The Company received net proceeds from the IPO of the Company's Common Stock of $32.5 million. The Bank 46 also received proceeds from the issuance of common stock in the Private Placement of $3.5 million in August 1996 and $10.0 million from the sale of the Debentures in March 1997. At September 30, 1997, the Bank exceeded all of its regulatory capital requirements with a tangible capital level of $16.3 million, or 6.19% of total adjusted assets, which is above the required level of $3.9 million, or 1.50%; core capital of $16.0 million, or 6.19% of total adjusted assets, which is above the required level of $7.9 million, or 3.0%, and risk-based capital of $27.9 million, or 13.49% of risk-weighted assets, which is above the required level of $16.6 million, or 8.0%. See "Regulation--Federal Savings Institution Regulation--Capital Requirements." The Company's most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At September 30, 1997, cash and short-term investments totalled $12.9 million. The Company has other sources of liquidity if a need for additional funds arises, including the utilization of FHLB advances. At September 30, 1997, the Bank had $6.9 million in advances outstanding from the FHLB. Other sources of liquidity include investment securities maturing within one year. The Bank also has two warehouse lines of credit available in the amount of $250.0 million of which $54.6 million had been drawn upon at September 30, 1997, and is in the process of negotiating a third warehouse line of credit in the amount of $250.0 million to fund loan originations. The Company has a residual financing line of credit in the amount of $40.0 million. See "Risk Factors Related to the Company-- Availability of Funding Sources." The Company had no material contractual obligations or commitments for capital expenditures at September 30, 1997. At September 30, 1997 the Company had outstanding commitments to originate or purchase mortgage loans of $37.9 million compared to $9.2 million at December 31, 1996. The Company anticipates that it will have sufficient funds available to meet its current loan origination commitments. See "Business--Background of the Company." Certificates of deposit which are scheduled to mature in one year or less from September 30, 1997, totalled $134.3 million. The Company expects that a substantial portion of the maturing certificates of deposit will be retained by the Company at maturity. IMPACT OF INFLATION AND CHANGING PRICES The Financial Statements and Notes thereto presented herein have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. IMPACT OF NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that long lived assets and certain identifiable intangibles be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. However, SFAS No. 121 does not apply to financial instruments, core deposit intangibles, mortgage and other servicing rights or deferred tax assets. The adoption of SFAS No. 121 in 1996 did not have a material effect on the Company's results of operations or financial condition. Effective July 1, 1995, the Bank adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"), which amended SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 122 requires an institution that purchases or originates mortgage loans and sells or securitizes those loans with servicing rights retained to allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The impact of 47 adopting SFAS No. 122 was an increase in pretax earnings of $594,000, net income of $438,000 and earnings per share of $0.23, as adjusted for the Reorganization, for the year ended December 31, 1995. In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which encourages companies to account for stock compensation awards based on their fair value at the date the awards are granted. SFAS No. 123 does not require the application of the fair value method and allows for the continuance of current accounting methods, which require accounting for stock compensation awards based on their intrinsic value as of the grant date. However, SFAS No. 123 requires proforma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this Statement had been applied. The accounting and disclosure requirements of this Statement are effective for financial statements for fiscal years beginning after December 15, 1995. The Company did not adopt the recognition provisions of SFAS No. 123 with respect to its Stock Option Plans. In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"), which was amended by SFAS No. 127. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial- components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial-components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial-components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. This Statement supercedes SFAS No. 122, "Accounting for Mortgage Servicing Rights." The adoption of SFAS No. 125 did not have a material impact on the Company's results of operations or financial condition. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"), which is effective for financial statements issued for periods ending after December 15, 1997. It replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires the presentation of diluted earnings per share for entities with complex capital structures. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock, such as options, were exercised or converted into common stock. The Company does not believe that SFAS No. 128 will have a material impact on its financial statements. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from net worth and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management is in the process of determining the impact, if any, this statement will have on the Company. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires disclosures for each segment that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. It requires limited segment data on a quarterly basis. It also requires geographic data by country, as opposed to broader geographic regions as permitted under current standards. SFAS No. 131 is effective for fiscal year beginning after December 15, 1997 with earlier application permitted. Management is in the process of determining the impact, if any, this statement will have on the Company. 48 BUSINESS BACKGROUND OF THE COMPANY In connection with the Reorganization and the IPO, LIFE Financial Corporation became the holding company of the Bank. The Company originates, purchases, sell, securitizes and services primarily non-conventional mortgage loans principally secured by first and second mortgages on one- to four-family residences. The Company makes Liberator Series loans, which are for the purchase or refinance of residential real property by sub-prime borrowers, and Portfolio Series loans, which are debt consolidation loans for Agency- Qualified Borrowers with loan-to-value ratios of up to 135%. The Company has recently increased the permitted loan-to-value ratios on Portfolio Series loans to 135% from 125%. While the Company is currently emphasizing the origination of Portfolio Series loans, it intends to market both products as demand permits. In addition, to a much lesser extent, the Company originates multi-family residential and commercial loans. The Bank was originally chartered in 1983 as a stock savings and loan association under the laws of the State of California and became a federally chartered stock savings bank in 1991. The Company conducts its business from six locations: the Company's corporate headquarters and Western Regional Lending Center in Riverside, California, two additional regional lending centers, one in Jacksonville, Florida and one in the Denver, Colorado metropolitan area, the national servicing center located in Riverside, California, and two bank branch officers in San Bernardino and Riverside, California. In addition, the Company has recently opened two low-cost retail lending offices, and has entered into leases for an additional four retail lending offices to be opened by the end of 1997. In addition, the Company intends to open two retail lending offices in the first quarter of 1998. With the exception of one planned office expected to be opened in Northern California, the Company's two current and five of the six planned retail lending offices will be located in Southern California. See "Recent Developments." At September 30, 1997, the Company had consolidated total assets of $294.1 million, total deposits of $159.8 million and total stockholders' equity of $49.5 million. During the nine months ended September 30, 1997, the Company originated or purchased, through its Originators, $433.4 million of non- conventional mortgage products and sold or securitized $277.1 million of such products. The Bank's deposits are insured up to the maximum allowable amount by the SAIF of the FDIC. During the early 1990's, as a result of reduced employment levels and corporate relocations in Southern California and the general weakness of the national economy, the Company's market area experienced a weakening of real estate values and a reduction in home sales and construction. When confronted with increased competition and nominal growth during this same period, the Company's results of operations were adversely impacted and the Company began to experience increases in total non-performing loans held for investment. In response, in 1994, the Company retained new management experienced in sub- prime lending to redirect its business focus, revise its underwriting policies and procedures and enhance its related servicing capabilities. A plan was developed pursuant to which the Company reorganized its lending operations from that of a thrift emphasizing traditional mortgage banking and portfolio lending to that of a diversified financial services operation focusing on the origination for sale or securitization, with servicing retained, of various loan products to include Liberator Series loans, Portfolio Series loans, and, to a much lesser extent, commercial and multi-family real estate loans. The Company also adopted revised underwriting policies and instituted more aggressive procedures for resolving problem loans and for reducing the level of non-performing assets. As a result of these steps, the Company improved its profitability. As part of the Company's strategic plan, the Company developed an internal structure of operating divisions within the Bank, each with distinct objectives and management focus. The five divisions include (i) the Financial Services Division which emphasizes the wholesale origination of the Company's core products; (ii) the Income Capital Services Division which originates and sells commercial and multi-family mortgage loans; (iii) the Retail Loan Division which concentrates on offering loan products directly to the public primarily in the Company's primary market area; (iv) the Asset Management Division which services loans and REO for both the Company 49 and for Loan Purchasers; and (v) the Banking Division which offers depository services to the public. In 1994, the Bank began to implement its plan which resulted in: . An increase in total purchases and originations of loans by 171.5% from $82.0 million for the year ended December 31, 1993 to $222.6 million for the year ended December 31, 1996. For the nine month period ended September 30, 1997, loans originated and purchased totalled $433.4 million. . An increase in loan sales and securitizations by 191.0% from $71.0 million for the year ended December 31, 1993 to $206.6 million for the year ended December 31, 1996. For the nine month period ended September 30, 1997, loan sales and securitizations totalled $277.1 million. . An increase in net income of 1,518.3% from $93,000 for the year ended December 31, 1993, to $1.5 million for the year ended December 31, 1996. For the nine month period ended September 30, 1997, net income was $7.7 million. . An increase in net gains from mortgage financing operations by 663.6% from $1.1 million for the year ended December 31, 1993, to $8.4 million for the year ended December 31, 1996. For the nine month period ended September 30, 1997, net gains from mortgage financing operations totalled $17.4 million. . An increase in deposits from $72.0 million at December 31, 1993 to $85.7 million at December 31, 1996. Deposits increased further to $159.8 million at September 30, 1997. The Bank also obtained warehouse lines of credit with two national investment banking firms aggregating $250.0 million, of which $54.6 million has been drawn upon at September 30, 1997. In addition, the Company obtained a line of credit in the amount of $40.0 million secured by residual assets created by the Company's securitization activities. See "Recent Developments." . An increase in stockholders' equity from $4.4 million at December 31, 1993 to $9.3 million at December 31, 1996, due to an increase in retained earnings and to the proceeds from the issuance of Bank common stock in a private placement during 1996 totaling $3.5 million. Stockholders' equity increased further to $49.5 million at September 30, 1997, due to an increase in retained earnings and to the net proceeds from the issuance of Common Stock in the IPO totaling $32.5 million during 1997. The Bank also issued $10.0 million of the Debentures during 1997 to increase its risk based capital. COMPETITIVE STRENGTHS Management believes that it enjoys a competitive advantage when compared to most other finance companies competing in its product areas as a result of the following factors: Expertise of Management. The change in direction of the Company's business focus commenced with the hiring in 1994 of Daniel L. Perl, currently the Company's and the Bank's President and Chief Executive Officer. Mr. Perl has more than twenty years of experience in the financial services industry, including the areas of sub-prime lending, commercial real estate lending, mortgage banking and investment banking. Additional management expertise includes: . Mr. Bruce Mills has more than 15 years in banking and regulatory experience including service at the Federal Home Loan Bank, the predecessor of the OTS and ten years as chief financial officer of the Bank. . Ms. Mary Darter has more than 13 years of lending experience including sub-prime, bulk acquisition and warehouse lending. She joined the Bank in March of 1994 having previously worked with Mr. Perl from 1988 to 1991. . Mr. Joseph R. L. Passerino has been in the financial services industry for more than 20 years. His areas of expertise have included conventional and sub-prime residential loans as well as commercial lending. Mr. Passerino previously worked with Mr. Perl from 1985 to 1988. . Mr. Stephen Sandoval has more than 24 years of extensive experience in the servicing and collection of mortgage and consumer loans with a primary focus on loss mitigation including workout alternatives, bankruptcy and foreclosure processing in addition to traditional day to day loan servicing functions. 50 . Mr. Robert K. Riley joined the Company's Board of Directors after the IPO. Mr. Riley is the co-founder and Chief Executive Officer of Millenium Asset Management, L.L.C., a registered investment advisory firm. From 1992 to 1996, Mr. Riley worked for the Millenium Group, a consulting firm focused on designing asset securitization systems and developing risk management programs for European banks. The Board has implemented competitive management incentives to attract and retain qualified executives. See "The Board of Directors and Management of the Bank--Benefits--Cash Bonus Plan" and "--Stock Option Plans." Efficiency of Operations. Management believes that the efficiency of its operations allows the Company to offer to its Originators very competitively priced products. Management believes that this competitive pricing will increase the volume of loans originated. The efficiency of the Company's operations results from: . Providing Originators with clear, concise and consistent underwriting standards; . Well defined core products; . Low cost, strategically located loan facilities; . Rapid turnaround time on loan applications; . Limited number of strong and productive relationships with Originators; and . Originations of loans at low premiums or at a discount from par. Internal Controls. Management believes that the significant internal controls that have been established help preserve and assure the overall quality of loans originated by the Company. These internal controls include: . Dual signatures on all loan originations; . Unanimous approval by two persons, including a member of senior management, of any exceptions to the Company's underwriting policies; . Exceptions to the Company's underwriting policies are kept to a minimum; . A limited number of appraisers approved by the Company's senior management perform or review appraisals on all loans originated or purchased by the Company; . For all loans on first payment default or 60 days overdue, a quality control review is completed by the quality control department; . Internal quality-control underwriting review of not less than 10.0% of all Liberator Series loans and 5% of all Portfolio Series loans originated, post-funding; and . Regularly-scheduled underwriting and delinquency meetings are held to review and update procedures and controls. Flexible Funding Sources and Structure. The Company has multiple sources of liquidity. As a federally-chartered savings bank, the Bank has additional funding avenues at a lower cost than its non-regulated finance company competitors. This advantage is derived from the Bank's ability to: . Access a long-term stable unsecured funding base through the Bank's deposits which are insured by the FDIC; . Increase its deposit base through competitive pricing and possible branch acquisitions or acquisitions of other depository institutions; and . Access funding through the FHLB. In addition, both the Bank and the Company have access to lines of credit from major financial institutions. The Bank has two warehouse lines of credit available in the aggregate amount of $250.0 million to fund loan originations, of which $54.6 million has been drawn upon at September 30, 1997, and is in the process of negotiating a third warehouse line of credit in the amount of $250.0 million. The Company has a line of credit in the amount of $40.0 million secured by residual assets created by the Company's securitizations. See "Recent Developments." 51 Diversification Opportunities. The Company is a unitary savings and loan holding company which generally is not restricted in the types of business activities which it may conduct provided that the Bank continues to be a QTL. See "Regulation--Federal Savings Institution Regulation--QTL Test." The Reorganization provided the Company with: . The opportunity to expand its current product line and enter into possible new product areas; . Broader investment opportunities than the Bank; and . Alternative access, if necessary, to the capital markets. GROWTH AND OPERATING STRATEGIES Management believes that, as a result of its competitive strengths, the Bank and the Company will be able to implement the following growth and operating strategies: . Expanding Core Products Through a National Originator Network. The Company will continue to emphasize and to expand the origination of its core products, Liberator Series loans and Portfolio Series loans, for sale through securitizations and in the secondary market. Continued growth in the origination of core products will result primarily from geographic expansion and greater penetration in existing markets. In particular, since the beginning of 1997, the Company has widely advertised its NINA loan product, which is a limited documentation, lower loan-to-value loan program within the Liberator Series. NINA loans constituted $29.2 million of the $152.9 million of Liberator Series loans originated during the nine months ended September 30, 1997. In order to improve its ability to service its expanding network of Originators, the Company has established strategically located, low cost regional lending centers in Riverside, California, Jacksonville, Florida and in the Denver, Colorado metropolitan area. Over the next nine months, the Company intends to open three additional regional lending centers, which are likely to be strategically located in Northern California and in the Northeast and Midwest sectors of the United States, to better serve its Originators. . Expanding Retail Lending Production. The Company's retail lending operations currently focuses on retail loans located in the Company's primary market area of Southern California. The retail lending offices will focus on the origination of Liberator Series and Portfolio Series loans. In addition, the retail lending offices will originate non-core product loans to Agency-Qualified Borrowers. Non-core product loans originated by the retail lending offices will be sold to Loan Purchasers. The Company intends to gradually and selectively expand its retail lending operations. As part of this process, the Company has opened two low cost retail offices and has entered into leases for an additional four retail offices to be opened by the end of 1997. In addition, the Company intends to open two retail lending offices in the first quarter of 1998. With the exception of one planned office expected to be opened in Northern California, the Company's two current and five of the six planned retail lending offices will be located in Southern California. Such offices are expected to become operational in the first quarter of 1998. In addition, the Company intends to further expand by opening additional retail offices outside of Southern California. The Company believes that expanding its retail lending operations will reduce the possibility that its borrowers will refinance their loans with other lenders. . Expanding Multi-Family and Commercial Lending. In continuing with its tradition as a niche market lender and in an effort to diversify product offerings, the Company has begun to focus its efforts on the origination and purchase of multi-family and commercial real estate loans in the range of $50,000 to $1.5 million both in its primary market area and throughout the United States through a selected group of originators. The Company is currently purchasing such loans at a discount and, although there can be no assurances, expects to be able to continue to purchase such loans at a discount or low premium. The Company employs underwriters who specialize in commercial and multi-family real estate lending and utilizes a select group of appraisers experienced in these products. In addition, two members of senior management have considerable expertise in multi-family and commercial real estate lending. The Company was primarily limited in its ability to originate multi-family and commercial real estate loans by its level of available capital. The Company is gradually expanding such originations 52 as its available capital has increased. For the nine months ended September 30, 1997, the Company originated $25.1 million of multi-family and commercial loans, as compared to $7.1 million for the nine months ended September 30, 1996. The Company believes that it has the infrastructure in place to accommodate this expansion. All multi-family and commercial real estate loans are originated for sale in the secondary market and are currently being sold as whole loans. In the future, they may also be sold through securitizations. . Consistently Refining Operating Procedures. The Company intends to maintain loan quality by continuing to refine its underwriting criteria. Regularly-scheduled meetings of the Company's underwriting personnel are held in part to discuss operational issues as well as refinements to the Company's underwriting policies. In addition, the Company conducts regular loan delinquency meetings to discuss problem areas in the Company's servicing portfolio in order to reduce the likelihood of the recurrence of such problems in future loans. As necessary, the Company adds personnel to its loan processing staff and continues to utilize advancements in computer technology to provide prompt turnaround on loans, efficient underwriting procedures and accurate credit verification. In addition, the Company has a quality control department that is dedicated to maintaining quality control, reviews loan files to assure that each complies with the Company's underwriting policies, reviews all loans upon first payment default and loans sixty days delinquent, provides feedback and training to the underwriters to minimize future defaults and delinquencies, and investigates all fraudulent loans. . Enhancing Servicing Capabilities. As the Bank has transitioned from a traditional thrift to a diversified financial services operation, it has expanded its servicing department from a total of four persons at December 31, 1994 to 20 persons at September 30, 1997. The head of the servicing department has 24 years of experience in loan servicing and collections including responsibility for a $10.0 billion portfolio of approximately 255,000 loans and a staff of 70 people. In anticipation of its future servicing needs, the Company has dedicated substantial space in its current Riverside facility to house loan servicing operations. The Company is in the process of implementing a power dialing system and intends to implement computer imaging in the future. . Diversifying Funding Sources. In addition to its traditional thrift funding sources of deposits and loans from the FHLB, the Company has diversified its funding sources in recent periods. During the nine months ended September 30, 1997, net cash received from the Company's securitizations and sales provided a significant source of funding to the Company, aggregating $277.6 million for that period. The Bank has two warehouse lines of credit available in the aggregate amount of $250.0 million to fund loan originations, of which $54.6 million has been drawn upon at September 30, 1997, and is in the process of negotiating a third warehouse line of credit in the amount of $250.0 million. The Company has a line of credit in the amount of $40.0 million secured by residual assets created by the Company's securitizations. CORPORATE STRUCTURE The Company and the Bank consummated the Reorganization in June of 1997 whereby the Bank became a wholly-owned subsidiary of the Company. Management believes that the holding company form of organization provides the Company with more flexibility and a greater ability to compete with other financial services companies in the market place. In addition, due to regulatory capital limitations, the Bank is limited in the amount of investments in residuals and restricted cash resulting from securitizations that it can retain. The Company is not subject to such limitations, and thus will reduce the restrictions on the Bank's regulatory capital by acquiring and holding the residuals upon completion of a securitization. CORE LENDING PRODUCTS General. The Company originates, purchases, sell, securitizes and services primarily non-conventional mortgage loans principally secured by first and second mortgages on one- to four-family residences. The 53 Company makes Liberator Series loans, which are for the purchase or refinance of residential real property by sub-prime borrowers, and Portfolio Series loans, which are debt consolidation loans for Agency-Qualified Borrowers with loan-to-value ratios of up to 135%. The Company has recently increased the permitted loan-to-value ratios on Portfolio Series loans to 135% from 125%. For the three months ended September 30, 1997, $305,000, or 0.3% of the $104.2 million of Portfolio Series loans originated by the Company had loan to value ratios between 125% and 135%. While the Company is currently emphasizing the origination of Portfolio Series loans, it intends to market both products as demand permits. In addition, to a much lesser extent, the Company originates multi-family residential and commercial loans. The Company purchases and originates mortgage loans and other real estate secured loans primarily through a network of Originators on a nationwide basis. In addition, the Company has begun to open low-cost retail lending offices. Except for a limited number of loans specifically originated for retention in the Bank's portfolio as loans held for investment, loans originated or purchased since 1994 through the Company's regional lending centers are generally originated for sale in the secondary mortgage market and, since the fourth quarter of 1996, in asset securitizations with servicing retained by the Company. Adjustable Rate Mortgages. The Company's adjustable rate mortgage ("ARM") products consist of both first and second mortgages. The repayment and amortization terms on first mortgage ARMs are 360 months. The repayment and amortization terms on second mortgage ARMs may be 300, 240 or 180 months. Interest rates adjust every six or twelve months, and are tied to the six- month LIBOR or to the 1-Year U.S. Treasury Index, respectively. The periodic rate caps vary between 1% and 3% on each rate change date. All ARM products are assumable, subject to new borrower qualification, assumption agreements and fees. The lifetime rate cap on ARMs is 6% to 7% above the initial rate. None of the ARM products permit negative amortization. There are no fixed rate conversion options on any of the ARM products. Certain ARM products impose prepayment penalties and others do not. Marketing. The Company's primary means of marketing its products is direct contact between its account executives and Originators. Each of the Company's 27 account executives is responsible for maintaining and expanding existing Originator relationships within the account executive's assigned territory through personal contact and promotional materials. Each account executive is typically responsible for approximately 20 key Originators and is expected to have weekly contact with each of these Originators. In addition, each account executive is responsible for up to 30 additional Originators with whom the account executive will have frequent contact. Each account executive also works to develop Originator relationships through "cold calls" and following up on inquiries made by Originators to the Company's toll-free number. Each account executive works as part of a team with one of the Company's loan coordinators and assistant coordinators. Each loan coordinator and assistant loan coordinator works with three or four account executives. The loan coordinators and their assistants are responsible for inputting the new loans into the Company's data systems and for shepherding the loans from the point of origination through funding. After origination, the whole loan coordinators and their assistants are available to talk to Originators on a daily basis. Whole loan coordinators and their assistants are located in each of the Company's regional lending centers. The Company believes that the key element in developing, maintaining and expanding its relationships with Originators is to provide the highest possible level of product knowledge and customer service. Each account executive receives comprehensive training prior to being assigned to a territory. In most cases, training includes experience in the loan production department so that the account executive will be familiar with all phases of loan origination and production and will also become acquainted with the whole loan coordination team. This training enables the account executive to quickly review a loan application in order to identify the borrower's probable risk classification and then assist the Originator in identifying the appropriate product for the borrower, thereby enhancing the likelihood that the loan will be approved at the rate and on the terms anticipated by the borrower. After a loan package is submitted to the Company, the loan coordination team provides assistance to the Originator throughout the process to complete the loan transaction. Account executives, loan coordinators and assistant coordinators are compensated based on the number and the dollar volume of loans funded. A significant portion of a regional manager's compensation is tied to the profitability of his or her regional lending center and includes a component based on loan performance. 54 Origination and Purchase of Loans. Loans are originated both through the Company's wholesale network of Originators and on a retail basis through the Company's Retail Lending Division. The Company has also made bulk purchases of loans from time to time and has recently hired a senior management employee experienced in bulk purchases to gradually expand the Company's loan purchases. The Company's mortgage financing and servicing operations are conducted primarily through regional lending centers located in Riverside, California, Jacksonville, Florida and the Denver, Colorado metropolitan area. Over the next nine months the Company intends to open three additional low cost regional lending centers to better serve its Originators. These regional lending centers are likely to be strategically located in Northern California and in the Northeast and Midwest sectors of the United States. From its present locations, the Company is able to originate or purchase its core products in the District of Columbia and all 50 states with the exception of Louisiana, Mississippi and Alaska. The following table sets forth for the periods shown the aggregate dollar amounts and the percentage of core products originated or purchased by the Company in each state where 5.0% or more of the loans were originated or purchased during the three months ended September 30, 1997:
FOR THE THREE MONTHS ENDED ------------------------------------------------------------ DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1996 1997 1997 1997 ------------- ------------- -------------- -------------- $ % $ % $ % $ % ------- ----- ------- ----- -------- ----- -------- ----- (DOLLARS IN THOUSANDS) California....... $20,434 29.5% $26,421 29.8% $ 32,827 24.3% $ 33,614 19.8% Utah............. 6,208 9.0 7,958 9.0 6,202 4.6 9,280 5.5 Virginia......... 5,961 8.6 5,884 6.6 7,489 5.5 9,575 5.6 Maryland......... 4,878 7.1 4,492 5.1 6,839 5.1 9,851 5.8 Alabama.......... 1,607 2.3 1,195 1.3 7,752 5.7 9,022 5.3 Other............ 30,072 43.5 42,689 48.2 74,098 54.8 98,795 58.0 ------- ----- ------- ----- -------- ----- -------- ----- Total.......... $69,160 100.0% $88,639 100.0% $135,207 100.0% $170,137 100.0% ======= ===== ======= ===== ======== ===== ======== =====
The Company's geographic markets are currently divided into three regions, with a completely self-contained mortgage banking team assigned to each region. Each team is headed up by a regional manager and includes dedicated account executives, loan coordinators and assistant coordinators, underwriters, and other production personnel so that the team can originate and produce loans in that region. This concept of regional processing teams, which the Company believes is efficient but quite rare in the industry, enables the Company to more effectively anticipate and respond to Originator and borrower needs in each region. Management believes that the concept also appeals to independent brokers who may be reluctant to deal with a larger, more remote lender. Each regional team is connected to senior management in Riverside, California by a computer link that enables senior management to monitor all regional functions on a real time basis. Personnel staffing a regional lending center are trained in the Company's Riverside office. For a period of six to twelve months after the establishment of a regional lending center all loans originated through that office are reunderwritten by staff at the Riverside office to assure quality control. In addition, staff of the quality control department and the Company's internal auditor regularly visit the regional lending centers for quality control purposes. In recent years, the Company has focused on both Liberator Series loans and Portfolio Series loans. While the Company is currently emphasizing the origination of Portfolio Series loans, it intends to originate both types of loans as demand permits. Liberator Series loans are loans for the purchase or refinance of one- to four-family residential real property by sub-prime borrowers and loans which otherwise do not conform to FHLMC or FNMA guidelines ("conforming loans"). Loans to sub-prime borrowers are perceived by management as being advantageous to 55 the Company because they generally have higher interest rates and origination and servicing fees and generally lower loan-to-value ratios than conforming loans. In addition, management believes the Company has the resources to adequately service loans acquired pursuant to this program as well as the experience to resolve loans that become non-performing. The Company has established specific underwriting policies and procedures, invested in facilities and systems and developed correspondent relationships with Originators throughout the country enabling it to develop its niche as an originator and purchaser of one- to four-family residential loans to sub-prime borrowers. Since the beginning of 1997, the Company has widely advertised its NINA loan product, which is a limited documentation, lower loan-to-value loan product within the Liberator Series loan portfolio. The Company intends to continue to expand the volume of Liberator Series loans which it originates to market areas throughout the country, to sub-prime borrowers who meet its niche lending criteria. See "Risk Factors Related to the Company--Risks Associated with Sub-Prime Lending." Portfolio Series loans, which are debt consolidation loans for Agency Qualified Borrowers, are originated both on a wholesale basis through the Company's Life Financial Services Division, and through its Retail Lending Division. These loans are consumer-oriented loans secured by real estate, primarily home equity lines of credit and second deeds of trust, for up to 135% of the appraised value of the real estate underlying the aggregate loans on the property. The Company recently increased the permitted loan-to-value ratio on Portfolio Series loans to 135% from 125%. Although the loan-to-value ratio on Portfolio Series loans is higher than that offered by other mortgage products, management believes that the higher yield and the low level of credit risk of the borrowers offsets the risks involved. See "--Underwriting" and "Risk Factors Related to the Company--High Loan to Value Ratios of Portfolio Series Loans." The following table sets forth the principal balance of each of the Company's core loan products originated and purchased during the periods shown:
FOR THE THREE MONTHS ENDED ----------------------------------------------------------------- DECEMBER 31, 1996 MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 ----------------- -------------- ------------- ------------------ (IN THOUSANDS) Liberator Series (full documentation)......... $39,465 $39,629 $ 39,589 $ 44,484 Liberator Series (NINA)(1).............. -- -- 7,803 21,410 Portfolio Series........ 29,695 49,010 87,815 104,243 ------- ------- -------- -------- Total................. $69,160 $88,639 $135,207 $170,137 ======= ======= ======== ========
- ------- (1) The Company did not originate a material amount of Liberator Series (NINA) loans during the three months ended December 31, 1996 and March 31, 1997. The following table sets forth selected information relating to originations of Liberator Series loans during the periods shown:
FOR THE THREE FOR THE THREE FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED MONTHS ENDED MONTHS ENDED JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, MARCH 31, --------------------------------- -------------------------- 1996 1997 FULL DOCUMENTATION NINA FULL DOCUMENTATION NINA ------------- ------------- -------------------- ------------ ------------------ ------- (DOLLARS IN THOUSANDS) Principal balance....... $39,465 $39,629 $ 39,589 $ 7,803 $44,484 $21,410 Average principal balance per loan....... 85 100 81 103 91 114 Combined weighted average initial loan- to-value ratio......... 73.4% 72.8% 78.2% 69.0% 77.3% 73.1% Percent of first mortgage loans......... 85.4 91.8 88.8 100 87.4 98.5 Property securing loans: Owner occupied........ 86.4 77.3 90.5 92.9 91.5 93.6 Non-owner occupied.... 13.6 22.7 9.5 7.1 8.5 6.4 Percentage fixed-rate... 44.2 35.6 42.4 24.1 33.4 23.1 Percentage ARMs......... 55.8 64.4 57.6 75.9 66.6 76.9 Weighted average interest rate: Fixed-rate............ 11.3 10.8 10.9 11.2 11.2 11.2 ARMs.................. 9.6 9.1 10.0 10.0 9.4 9.3
56 The following table sets forth selected information relating to originations of Portfolio Series loans during the periods shown:
FOR THE FOR THE FOR THE THREE FOR THE THREE THREE MONTHS THREE MONTHS MONTHS ENDED MONTHS ENDED ENDED ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1996 1997 1997 1997 ------------- ------------- ------------ ------------- (DOLLARS IN THOUSANDS) Principal balance....... $29,695 $49,010 $87,815 $104,243 Average principal balance per loan....... 31 32 33 32 Combined weighted average initial loan- to-value ratio......... 108.4% 107.7% 110.0% 109.5%(1) Percent of first mortgage loans......... 0.1 0.5 0.1 -- Property securing loans: Owner occupied........ 99.5 99.8 100.0 100.0 Non-owner occupied.... 0.5 0.2 -- -- Percentage fixed-rate... 96.3 96.0 98.0 94.5 Percentage ARMs......... 3.7 4.0 2.0 5.5 Weighted average interest rate: Fixed-rate............ 14.1 13.8 14.0 13.8 ARMs.................. 11.2 10.3 11.3 11.3
- -------- (1) For the three months ended September 30, 1997, approximately $18.5 million, $54.0 million and $305,000 of Portfolio Series loans originated had initial loan-to-value ratios of 100%-110%, 110%-125% and 125%-135%, respectively. Use and Qualifications of Originators. The Company purchases loans from select Originators throughout the country. Such Originators must be approved by the Company prior to submitting loans to the Company. Pursuant to the Company's approval process, each Originator is generally required to have a specified minimum level of experience in originating non-conforming loans, and provide representations, warranties, and buy-back provisions to the Company. The Company provides clear and concise criteria regarding its well-defined core products to Originators with whom it may do business. If, following a period of training and relationship building, Originators consistently fail to present a high level of loans meeting the Company's underwriting criteria, the Company will cease to do business with them. As a result, the Company has developed, since 1994, a core group of Originators who form its nationwide network of Originators. The Company generally classifies the Originators with which it does business into four classes with descending priority with regard to the terms and the pricing of the loans the Company purchases from such Originators.
JUNIOR THIRD PARTY MORTGAGE CORRESPONDENTS CORRESPONDENTS ORIGINATORS BROKERS(1) -------------- -------------- ----------- ---------- Net Worth(2)............. $250,000 $100,000 $50,000 N/A Years in Business........ 2 2 2 N/A Warehouse Credit Facility................ Yes Yes No No Errors and Omissions Insurance............... $1.0 million No No No Number Doing Business with the Company at September 30, 1997...... 85 94 104 903
- -------- (1) Mortgage brokers are those persons who do not meet the specific foregoing criteria but have demonstrated to the Company, or have a reputation for, the ability to originate real estate secured loans and have acceptable credit and finance industry references. (2) The net worth of Correspondents is provided by audited financial statements prepared in accordance with GAAP. Net worth of Junior Correspondents and Third Party Originators is provided through unaudited financial information. 57 The Company purchases substantially all loans on an individual basis from qualified Originators. No single Originator accounted for more than 4.0% of the loans originated by the Company for the nine months ended September 30, 1997. It is the Company's general policy to limit the percentage of loans closed by any single Originator to approximately 5.0% of loans closed in any given period. Underwriting. The underwriting and quality control functions are managed through the Company's regional lending center in Riverside, California. The Company believes that its underwriting process begins with the experience of its staff, the education of its network of Originators, the quality of its correspondent relationships and its loan approval procedures. As an integral part of its lending operation, the Company ensures that its underwriters assess each loan application and subject property against the Company's underwriting guidelines. Personnel in the Company's regional lending centers review in its entirety each loan application submitted by the Company, Originators or through bulk purchases for approval. The Company conducts its own underwriting review of each loan, including those loans originated for or purchased by it from its Originators. Loan files are reviewed for completeness, accuracy and compliance with the Company's underwriting criteria and applicable governmental regulations. This underwriting process is intended to assess both the prospective borrower's ability to repay the loan and the adequacy of the real property security as collateral for the loan granted, tailored to the general nature of the Portfolio Series and the Liberator Series loans, respectively. Based on the initial review, the personnel in the regional lending center will inform the Originators of additional requirements that must be fulfilled to complete the loan file. The Company strives to process each loan application received from its network of Originators as quickly as possible in accordance with the Company's loan application approval procedures. Accordingly, most loan applications receive decisions within 48 hours of receipt and generally are funded within one day following satisfaction of all conditions for approval of the loan which is typically seven business days after the initial approval. Each prospective borrower is required to complete a mortgage loan application that may include (depending on the program requirement) information detailing the applicant's liabilities, income, credit history, employment history and personal information. Since most of the loan applications are presented through the Company's network of Originators, the Company completes an additional credit report on all applications received. Such report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. This credit report is obtained through a sophisticated computer program that accesses what management believes to be the most appropriate credit bureau in a particular zip code and combines that information with the Company's own credit risk score. This application and review procedure is used by the Company to analyze the applicant's creditworthiness (i.e., a determination of the applicant's ability to repay the loan). Creditworthiness is assessed by examination of a number of factors, including calculating a debt-to-income ratio obtained by dividing a borrower's fixed monthly debt by the borrower's gross monthly income. Fixed monthly debt generally includes (i) the monthly payment under any related prior mortgages which will include calculations for insurance and real estate taxes, (ii) the monthly payment on the loan applied for and (iii) other installment debt, including, for revolving debt, the required monthly payment thereon, or, if no such payment is specified, 3% of the balance as of the date of calculation. Fixed monthly debt does not include any debt (other than revolving credit debt) described above that matures within less than 10 months of the date of calculation. Prior to funding a loan, several procedures are used to verify information obtained from an applicant. The applicant's outstanding balance and payment history on any senior mortgage may be verified by calling the senior mortgage lender. If the senior mortgage lender cannot be reached by telephone to verify this information, the Originators may rely upon information provided by the applicant, such as a recent statement from the senior lender and verification of payment, such as canceled checks, or upon information provided by national credit bureaus. In order to verify an applicant's employment status, the Originators may obtain from the applicant recent tax returns or other tax forms (e.g., W-2 forms) or current pay stubs or may telephone the applicant's 58 employer or obtain written verification from the employer. As in the case of the senior mortgage lender verification procedures, if the employer will not verify employment history over the telephone, the Company or other Originators may rely solely on the other information provided by the applicant. However, the Company does offer NINA loans at reduced loan-to-value ratios in lieu of documenting cash flow and assets of the borrower. See "--Liberator Series (NINA)" for further information on NINA loans. Debt to income ratios for Portfolio Series mortgage loans generally do not exceed 45%, but in certain instances where deemed appropriate by the Company, the ratio may go as high as 50%. For Liberator Series mortgage loans, debt to income ratios may vary depending upon a number of other factors used to ascertain the creditworthiness of the borrower. 59 The general criteria currently used by the Company in classifying prospective borrowers of its core loan products are summarized in the charts below. LIBERATOR SERIES (FULL DOCUMENTATION)(1)
"Ax" RISK "A-" RISK "B" RISK "C" RISK "Cx" RISK ------------- ------------- ------------- ------------- ------------- Maximum Loan-to-Value Ratio: Primary residence...... 95% 95% 80% 75% 65% Secondary residence.... 90% 90% 70% 70% 65% Investor property...... 90% 85% 70% 70% 65% Home equity line of credit(1)............. 90% 90% 80% -- -- Debt Service to Income Ratio.................. 42-50% 42-50% 50-55% 50-60% 60% Mortgage Credit......... Maximum one Maximum two Maximum four Maximum six Currently 30-day late 30-day late 30-day late 30-day late delinquent payment in payments in payments payments, two the last 12 the last 12 and/or one 60-day late months months 60-day late payments payment in and/or one the last 12 90-day late months payment in last 12 months Installment Credit...... Maximum one No more than No more than No more than Sporadic 30-day late 30 days late 60 days late 90 days late payment payment in in last 12 on any on any pattern; the last 12 months; account in account in apparent months; overall good last 12 last 12 disregard maximum two credit; months; months; toward timely 30-day late maximum 25% overall overall fair payments or payments in of credit average credit credit the last 24 accounts credit standing months delinquent in last 24 months Revolving Credit........ Maximum two No more than No more than No more than Sporadic 30-day late 30 days late 60 days late 90 days late payment payments in in last 12 on any on any pattern; the last 12 months; account in account in apparent months; isolated 60- last 12 last 12 disregard maximum three day late months; months; toward timely 30-day late payment isolated isolated late payments or payments in allowed with minor 90-day payment over credit last 24 compensating late payment 90 days standing months factors; allowed with allowed with maximum 25% compensating compensating of credit factors factors accounts delinquent in last 24 months Bankruptcy Filings...... No bankruptcy No bankruptcy No bankruptcy No bankruptcy Discharged in last 36 in last 24 in last 18 in last 12 within 12 months months months months months preceding application; current Chapter 13 or foreclosure acceptable when paid in full or cured from loan proceeds Minimum Credit Score.... 670/650 620 550 500 Less than 500
- -------- (1) Also includes Portfolio Series home equity lines of credit which are fully collateralized by the underlying property and which have a loan-to-value ratio of 90% or less. 60 LIBERATOR SERIES (NINA)
"Ax" RISK "A-" RISK "B" RISK "C" RISK "Cx" RISK ------------- ------------- ------------- ------------- ------------- Loan-to-Value Ratio: Primary residence...... 90%(1) 75% 70% 70% 65% Secondary residence.... 75% 70% 65% 65% 60% Investor property...... 75% 70% 65% 65% 60% Mortgage Credit......... Maximum one Maximum two Maximum four Maximum six Currently 30-day late 30-day late 30-day late 30-day late delinquent payment in payments in payments payments, two the last 12 the last 12 and/or one 60-day late months; no 30 months 60-day late payments days late payment in and/or one payments in the last 12 90-day late last 24 months payment in months for 90% last 12 months Installment Credit...... Maximum one No more than No more than No more than Sporadic 30-day late 30 days late 60 days late 90 days late payment payment in in last 12 on any on any patterns; the last 12 months; account account in apparent months; overall good within last last 12 disregard maximum two credit; 12 months; months; toward timely 30-day late maximum 25% overall overall fair payments or payments in of credit average credit credit the last 24 accounts credit standing months; no 30 delinquent in days late last 24 payments in months last 12 months for 90% Revolving Credit........ Maximum two No more than No more than No more than Sporadic 30-day late 30 days late 60 days late 90 days late payment payments in in last 12 on any on any patterns; the last 12 months, account in account in apparent months; isolated 60- last 12 last 12 disregard maximum three day late months; months; toward timely 30-day late payment isolated isolated late payments or payments in allowed with minor 90-day payment over credit last 24 compensating late payment 90 days standing months; no 30 factors; allowed with allowed with days late maximum 25% compensating compensating payments in of credit factors factors last 24 accounts months for delinquent in 90% last 24 months Bankruptcy Filings...... No bankruptcy No bankruptcy No bankruptcy No bankruptcy Discharged in last 36 in last 24 within last in last 12 within 12 months, none months 18 months months months in last 7 preceding years for 90% application; LTV current Chapter 13 or foreclosure acceptable when paid in full or cured from loan proceeds Minimum Credit Score.... 670/650 620 550 500 Less than 500
- -------- (1) Purchase or rate term only, A+ credit required, credit score minimum of 670; all others maximum LTV at 80%. 61 PORTFOLIO SERIES(1)
"A+" RISK "AX" RISK "A-" RISK "B+" RISK ------------- ------------- ------------- ------------- Loan-to-Value Ratio: 100% Second Mortgage... 100% 100% 100% 100% 135% Second Mortgage... 135% 135% 135% 135% 100% Home Equity Line of Credit............. 100% 100% 100% 100% Debt Service to Income Ratio: 100% Second Mortgage... 45-50% 45-50% 45-50% 45% 135% Second Mortgage... 45-50% 45-50% 45-50% 45% 100% Home Equity Line of Credit............. 45-50% 45-50% 45-50% 45% Mortgage History: 100% Second Mortgage... No 30-day No 30-day No 30-day One 30-day late payments late payments late payments late payment in last in last in last 12 in last 12 36 months 36 months months; one months or two 30-day late 30-day late payment in payments in last 24 last 24 months months 135% Second Mortgage... No 30-day No 30-day No 30-day One 30-day late payments late payments late payments late payment in last in last in last in last 36 months 36 months 24 months 24 months 100% Home Equity Line of Credit............. No 30-day No 30-day No 30-day One 30-day late payments late payments late payments late payment in last in last in last 12 in last 12 36 months 36 months months; one months or two 30-day late 30-day late payment in payments in last 24 last 24 months months Bankruptcy Filings: 100% Second Mortgage... None in last None in last None in last None in last 5 years 5 years 3 years 3 years 135% Second Mortgage... None in last None in last None in last None in last 5 years 5 years 3 years 3 years 100% Home Equity Line of Credit............. None in last None in last None in last None in last 5 years 5 years 3 years 3 years Minimum Credit Score: 100% Second Mortgage... 700 670 640 620 135% Second Mortgage... 700 670 640 620 100% Home Equity Line of Credit............. 700 670 640 620
- -------- (1) Excludes Portfolio Series home equity lines of credit which are fully collateralized by the underlying property and which have a loan-to-value ratio of 90% or less. 62 Loan Production by Borrower Risk Classification. The Company classifies borrowers according to credit risk from A+ to Cx; however, the predominant amount of its lending is to borrowers in categories A- or higher. The following table sets forth information concerning the Company's principal balance of fixed rate and adjustable rate loan production by borrower risk classification for the periods shown:
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 MARCH 31, 1997 --------------------------------- --------------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED PRODUCT/RISK % OF INTEREST AVERAGE % OF INTEREST AVERAGE CLASSIFICATIONS VOLUME TOTAL RATE(1) MARGIN(2) VOLUME TOTAL RATE(1) MARGIN(2) - --------------- ------- ----- -------- --------- ------- ----- -------- --------- (DOLLARS IN THOUSANDS) Liberator Series (Full documentation) Ax...................... $18,925 48.0% 9.94% 5.24% $17,159 43.3% 9.35% 5.11% A-...................... 8,790 22.3 10.16 5.52 9,241 23.3 9.85 5.52 ------- ----- ------- ----- Total A- or better.... 27,715 70.3 -- -- 26,400 66.6 -- -- ------- ----- ------- ----- B....................... 6,806 17.2 10.26 5.33 7,992 20.2 9.39 4.91 C....................... 2,026 5.1 11.16 5.68 2,555 6.4 10.98 5.77 Cx...................... 2,918 7.4 13.07 7.06 2,682 6.8 11.74 6.62 ------- ----- ------- ----- Total.................. $39,465 100.0% 10.34 5.46 $39,629 100.0% 9.74 5.31 ======= ===== ======= ===== Portfolio Series........ A+...................... $ 2,669 9.0% 13.58 2.50 $ 9,980 20.4 13.22 1.74 Ax...................... 14,452 48.7 13.87 2.18 18,733 38.2 13.53 1.83 A-...................... 9,866 33.2 14.35 3.24 15,193 31.0 14.05 3.27 ------- ----- ------- ----- Total A- or better.... 26,987 90.9 -- -- 43,906 89.6 -- -- ------- ----- ------- ----- B+...................... 2,708 9.1 14.10 3.73 5,104 10.4 14.07 2.7 ------- ----- ------- ----- Total.................. $29,695 100.0% 14.03 2.74 $49,010 100.0% 13.68 2.32 ======= ===== ======= ===== FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED JUNE 30, 1997 SEPTEMBER 30, 1997 --------------------------------- --------------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED PRODUCT/RISK % OF INTEREST AVERAGE % OF INTEREST AVERAGE CLASSIFICATIONS VOLUME TOTAL RATE(1) MARGIN(2) VOLUME TOTAL RATE(1) MARGIN(2) - --------------- ------- ----- -------- --------- ------- ----- -------- --------- (DOLLARS IN THOUSANDS) Liberator Series (Full documentation) A+...................... $ 47 0.1% 12.38% 7.00% $ 120 0.3% 9.67% 4.63% Ax...................... 18,778 47.4 9.88 5.47 15,797 35.5 9.48 5.77 A-...................... 9,663 24.4 10.03 6.05 16,059 36.1 9.76 6.17 ------- ----- ------- ----- Total A- or better.... 28,488 71.9 -- -- 31,976 71.9 -- -- ------- ----- ------- ----- B+...................... 119 0.3 9.75 -- 24 0.1 13.75 -- B....................... 4,303 10.9 10.82 6.06 5,911 13.3 10.31 6.32 C....................... 2,776 7.0 11.48 6.53 3,297 7.4 10.64 6.41 Cx...................... 3,903 9.9 12.59 8.15 3,276 7.3 12.18 7.28 ------- ----- ------- ----- Total................. $39,589 100.0% 10.40 6.08 $44,484 100.0% 9.98 6.14 ======= ===== ======= ===== Liberator Series (NINA) (3) Ax...................... $ 3,772 48.3% 9.56% 5.33% $13,789 64.4% 9.20% 5.54% A-...................... 2,325 29.8 10.14 6.05 3,188 14.9 9.81 6.3 ------- ----- ------- ----- Total A- or better.... 6,097 78.1 -- -- 16,977 79.3 -- -- ------- ----- ------- ----- B....................... 1,102 14.1 11.78 6.35 2,088 9.7 10.2 5.97 C....................... 332 4.3 12.27 6.83 592 2.8 11.09 7.07 Cx...................... 272 3.5 12.49 6.92 1,753 8.2 12.72 6.43 ------- ----- ------- ----- Total................. $ 7,803 100.0% 10.27 5.82 $21,410 100.0% 9.73 5.77 ======= ===== ======= =====
63
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED JUNE 30, 1997 SEPTEMBER 30, 1997 --------------------------------- ---------------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED PRODUCT/RISK % OF INTEREST AVERAGE % OF INTEREST AVERAGE CLASSIFICATIONS VOLUME TOTAL RATE(1) MARGIN(2) VOLUME TOTAL RATE(1) MARGIN(2) - --------------- ------- ----- -------- --------- -------- ----- -------- --------- (DOLLARS IN THOUSANDS) Portfolio Series A+...................... $19,086 21.7% 13.30% 8.02% $ 23,250 22.3% 12.98% 5.79% Ax...................... 27,954 31.8 13.85 6.50 31,914 30.6 13.49 6.50 A-...................... 31,234 35.6 14.28 7.22 38,521 37.0 14.00 6.99 ------- ----- -------- ----- Total A- or better.... 78,274 89.1 -- -- 93,685 89.9 -- -- ------- ----- -------- ----- B+...................... 9,435 10.8 14.69 7.18 10,472 10.0 14.38 7.51 B....................... 106 0.1 13.99 -- 86 0.1 12.27 6.88 ------- ----- -------- ----- Total................. $87,815 100.0% 13.98 7.38 $104,243 100.0% 13.66 6.64 ======= ===== ======== =====
- -------- (1) Weighted average interest rate includes both ARM loan products and fixed rate loan products. (2) Weighted average margin is based solely on ARM products. (3) The Company did not originate a material amount of Liberator Series (NINA) loans during the three months ended December 31, 1996 and March 31, 1997. Appraisal. All mortgaged properties relating to mortgage loans where collateral assessment is an integral part of the evaluation process are appraised by state licensed or certified appraisers. All of the appraisals are either performed or reviewed by appraisers or appraisal firms approved by the Company's senior management. These appraisers are screened and actively reviewed on a regular basis. Each approved appraiser must have a minimum of $2.0 million of errors and omissions insurance. All appraisers are required to assess the valuation of the property pursuant to U.S. Government Property Analysis guidelines and conduct an economic analysis of the geographic region in which the property is located. Once a loan application file is complete, the file is reviewed to determine whether the property securing the loan should undergo a desk or field review. This determination is made based on the loan-to-value ratio of the underlying property and the type of loan or loan program. If after the initial desk review, the underwriter requires additional information with regard to the appraised value of the property, a field review may also be conducted. The Company requires the appraiser to address neighborhood conditions, site and zoning status and the condition and valuation of improvements. Following each appraisal, the appraiser prepares a report which (when appropriate) includes a reproduction cost analysis based on the current cost of constructing a similar building and a market value analysis based on recent sales of comparable homes in the area. Title insurance policies are required on all first mortgage liens, with a limited judgment lien report required on all second lien loans under $100,000. For Liberator Series loans, because of the sub-prime creditworthiness of the borrowers, the evaluation of the value of the property securing the loans and the ratio of loans secured by such property to its value become of greater importance in the underwriting process. The specific procedures and criteria utilized in the appraisal process range from a desk review, a field review, to a second appraisal, depending on the size of the loan and its loan-to-value ratio. The value of the mortgaged property has lesser importance with respect to the Portfolio Series loans in light of their high loan-to-value ratios. As a result, Portfolio Series loans generally have little or no equity in the mortgaged property available to repay the loan if it is in default. For Portfolio Series loans, the Company accepts the homeowner/mortgagee's "as stated" value on loans to $35,000. On loans in excess of $35,000 to a maximum of $50,000, the Company requires a current tax assessment, a statistical appraisal or a HUD-1 conformed closing statement where purchase of the subject property has occurred within the previous 12 months. For loans in excess of $50,000, a drive-by appraisal including comparable analysis on a FHLMC Form 704 is required. Qualified property inspection firms are also utilized for annual property inspections on all properties 45 days or more delinquent. Property inspections are intended to provide updated information concerning occupancy, maintenance and changes in market conditions. 64 Loan Approval Procedures and Authority. The Board of Directors establishes the lending policies of the Company and delegates authority and responsibility for loan approvals to the Loan Committee and specified officers of the Company. All real estate loans must be approved by a quorum of the designated committee or by the designated individual or individuals. All loans underwritten by the Company require the approval and signature of two underwriters. Where there are exceptions to the Company's underwriting criteria, the loan must be unanimously approved by the underwriter, supervisory underwriter and the Senior Vice President of the Company or, if not unanimously approved, by the Company's President and Chief Executive Officer. It has been the Company's policy to adhere strictly to its underwriting standards with few exceptions. Additionally, the following committees, groups of officers and individual officers are granted the authority to approve and commit the Company to the funding of the following categories of loans:
LEVEL OF APPROVAL -------------------------------------------------------------- LOAN COMMITTEE ONE STAFF TWO STAFF LOAN AND BOARD OF TYPE OF LOAN UNDERWRITER UNDERWRITERS COMMITTEE DIRECTORS ------------ -------------- -------------- ---------------- -------------- Mortgage loans held for sale................... -- $1.0 million -- More than $1.0 or less(1) million Mortgage loans held for investment............. -- $250,000 or More than $550,000 or less $250,000 but more less than $550,000 Other loans............. Personal loans All other All other loans All other secured by loans $25,000 more than loans Bank deposits or less $25,000 but less in excess of than $50,000 $50,000
- -------- (1) Loans in excess of $500,000 require approval by an executive officer in addition to approval by two underwriters. The Bank will not make loans-to-one borrower that are in excess of regulatory limits. Pursuant to OTS regulations, loans-to-one borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. At September 30, 1997, the Bank's loans to one borrower limit equaled $2.7 million. See "Regulation--Federal Savings Institution Regulation--Loans-to-One Borrower." LOAN SALES AND ASSET SECURITIZATIONS Loans are sold by the Company through securitizations and whole loan sales. With the exception of customary provisions relating to breaches of representations and warranties, loans securitized or sold by the Company are sold without recourse to the Company and generally are sold with servicing retained. See "Risk Factors Related to the Company--Contingent Risks." For the nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994, the Company sold $277.1 million, $140.8 million, $154.6 million, $126.9 million and $65.7 million in loans, respectively. For the nine months ended September 30, 1997 and the year ended December 31, 1996, the Company securitized $204.0 million and $51.9 million, respectively. No loans were securitized for the nine months ended September 30, 1996 or the years ended December 31, 1995 or 1994. In a securitization, the Company will generally transfer a pool of loans to a trust with the Company retaining the excess cash flows, known as residuals, from the securitization which consist of the difference between the interest rate of the mortgages and the coupon rate of the securities after adjustment for servicing and other costs such as trustee fees and credit enhancement fees. The cash generally will be used to repay advances on lines of credit used to finance the pool of loans that were acquired by the Company. Generally, the holders of the securities from the asset securitization are entitled to receive scheduled principal collected on the pool of 65 securitized loans and interest at the pass-through interest rate on the certificate balance. The residual asset represents the subordinated right to receive cash flows from the pool of securitized loans after payment of the required amounts to the holders of the securities and the costs associated with the securitization. The Company recognizes gain on sale of the loans in the securitization, which represents the difference between the net proceeds to the Company in the securitization and the allocated cost of loans securitized. Management believes that it has made reasonable estimates of the present value of the residual interests on its balance sheets. Concurrent with recognizing such gain on sale, the Company records the residual interests as assets on its balance sheet. The recorded value of these residual interests are amortized as cash distributions are received from the trust holding the respective loan pool and are marked to market on a quarterly basis. The Company may arrange for credit enhancement for a transaction to achieve an improved credit rating on the securities issued if this improves the level of profitability or cash flow generated by such transaction. This credit enhancement may take the form of an insurance and indemnity policy, insuring the holders of the securities of timely payment of the scheduled pass-through of interest and principal. In addition, the pooling and servicing agreements that govern the distribution of cash flows from the loan pool included in a transaction typically require over-collateralization as an additional means of credit enhancement. Over-collateralization may in some cases also require an initial deposit, the sale of loans at less than par or retention in the trust of collections from the pool until a specified over-collateralization amount has been attained. In the case of the Company's securitizations to date, the over-collateralization has been in the form of a cash deposit. The purpose of the over-collateralization is to provide a source of payment to investors in the event of certain shortfalls in amounts due to investors. These amounts are subject to increase up to a reserve level as specified in the related securitization documents. Cash amounts on deposit are invested in certain instruments as permitted by the related securitization documents. To the extent amounts on deposit exceed specified levels, distributions are made to the holders of the residual interest; and at the termination of the related trust, any remaining amounts on deposit are distributed to the holders of the residual interest. Losses resulting from defaults by borrowers on the payment of principal or interest on the loans in a securitization will reduce the over-collateralization to the extent that funds are available and may result in a reduction in the value of the residual interest. See "Risk Factors Related to the Company--Dependence on Asset Securitizations and Impact on Quarterly Operating Results." 66 The Bank has completed three securitizations, one during the fourth quarter of 1996, one during the first quarter of 1997 and one during the third quarter of 1997. The characteristics and results of these securitizations are as follows:
1996-1 1997-1A 1997-1B 1997-2 --------------- --------------- --------------- --------------------- Type of loan securitized............ Fixed Rate Adjustable Rate Fixed Rate Fixed Rate Portfolio Liberator Liberator Liberator Series Series and Series Series and Portfolio Portfolio Series Series Weighted average coupon................. 13.32% 9.45% 13.02% 13.64% Amount of certificates issued................. $55.0 million $38.5 million $61.5 million $123.8 million Pass-through rate....... 6.95% 1 month LIBOR 7.49% 7.12%(5) plus 21 bp Amount of loans securitized(1)......... $51.9 million $33.6 million $46.5 million $100.9 million Credit enhancement...... MBIA Insurance MBIA Insurance MBIA Insurance Loan Corporation Corporation Corporation overcollateralization Initial funding of reserve accounts....... $1.6 million $941,000 $3.1 million $1.3 million Required reserve level to be funded........... 9.0% of 5.5% of 10.6% of 7.0% of original original original original outstanding balance outstanding outstanding outstanding of loans balance of balance of balance of loans loans loans Gain on sale of loans... $4.3 million $5.7 million(2) $5.7 million(3) $9.4 million Gain on sale of loans as a percent of loans sold................... 8.29% 7.12%(2) 7.12%(3) 9.33% Estimated prepayment speed.................. 17.0% H.E.P.(3) 25.0% 17.0% H.E.P. 12.0% H.E.P. C.P.R.(3)(4) Discount factor......... 13.5% 13.5% 13.5% 13.5% Annual estimated loss assumption............. 1.5% 0.5% 0.5% of 2.0% Liberator Series loans; 1.5% of Portfolio Series loans Servicing fees.......... 0.50% for the 0.65% for the 1.00% on fixed 1.00% first six first twelve rate loans sold months and months and 1.00% 1.00% thereafter thereafter Rating.................. AAA/Aaa AAA/Aaa AAA/Aaa (6) (S&P/Moody's) (S&P/Moody's) (S&P/Moody's)
- -------- (1) For 1996-1, an additional $3.1 million was funded during quarter ended March 31, 1997 which created a gain on sale of loans of $267,000. For 1997-1A, $4.9 million was funded in April 1997. For 1997-1B, $15.0 million was funded in April 1997. All of these prefunded amounts were sold under the same terms and conditions as set forth in the table above. (2) The combined gain on sales of loans for 1997-1A and 1997-1B was $5.7 million. The percentages are based on the combined 1997-1A and 1997-1B securitizations. (3) Home Equity Prepayment ("H.E.P.") and Constant Prepayment Rate ("C.P.R.") are methods of estimating prepayment speeds. (4) This prepayment assumption was revised during the third quarter of 1997 resulting in an unrealized loss to the Company of $787,000. See "Risk Factors Related to the Company--Risks Related to Mortgage Servicing Rights and Residual Assets." (5) Weighted average rate. (6) Each of the Senior Notes were rated AAA/Aaa (Fitch/Moody's), the Class M-1 notes were rated AA/A2, the Class M-2 Notes were rated A/A2 and the Class B notes were rated BBB/Baa3. 67 The following table presents the actual loss and prepayment history as of September 30, 1997 for the securitizations conducted by the Company:
1996-1 1997-1A 1997-1B 1997-2 ------ ------- ------- ------ Actual loss percentage...................... 0.56% 0.00% 0.17% 0.00% Prepayments as a percentage of loans securitized annualized..................... 10.45% 43.92% 4.72% 2.44%
The actual loss and prepayment history information provided above are not necessarily indicative of loss and prepayment results that may be experienced over the duration of the securitization. Although the Company will continue to sell whole loans, it plans to sell most loans in the future through securitizations. Securitizations are expected to increase the Company's cash flow thereby allowing the Company to increase its loan acquisition and origination volume. Securitizations are also expected to reduce the risks associated with interest rate fluctuations and provide access to longer term funding sources. The Company currently intends to conduct regular securitizations either through private placements or in public offerings. There can be no assurance that the Company will be able to successfully implement this strategy in the future. See "Risk Factors Related to the Company--Dependence on Asset Securitizations and Impact on Quarterly Operating Results." To the extent that loans are not sold in securitizations, whole loans will be sold pursuant to purchase, sale and servicing agreements negotiated with Loan Purchasers to purchase loans meeting the Company's underwriting criteria. At September 30, 1997 there were outstanding commitments to deliver mortgage loans in the amount of $21.3 million. The Company retains the servicing rights on the majority of loans sold. However, the Company also sells loans on a servicing released basis and may continue to subservice the loans for a fee for a period of time. The Company sells loans to a number of different investors with which it does business. As such, management believes that no one relationship with a Loan Purchaser constitutes the predominant source of sales for the Company and the Company does not rely on any specific entities for sales of its loans. COMMERCIAL REAL ESTATE AND MULTI-FAMILY REAL ESTATE LENDING Consistent with its strategy of developing niche lending markets, the Company has begun to increase its efforts to originate and purchase multi- family and commercial real estate loans both in its primary market area and throughout the United States. Specifically, the Company has begun to target the market for borrowers seeking loans in the range of $50,000 to $1.5 million, subject to the Bank's loans-to-one borrower limit, currently $2.7 million, which are secured by multi-family properties or properties used for commercial business purposes such as small office buildings, light industrial or retail facilities. Since the Company has been able to acquire such loans at a discount and expects to be able to continue to acquire such loans at a discount or low premium, management believes that the origination and subsequent sale of commercial and multi-family real estate loans will increase the Company's cash flow. The Company has streamlined and standardized its processing of commercial and multi-family real estate loans with a view to sale in the secondary market or securitization. Since 1994, substantially all commercial and multi-family real estate loans originated by the Company have been sold in the secondary market without recourse. Although there can be no assurances in this regard, management intends to gradually expand the operations of this subsidiary, thereby adding a source of revenue for the Company as well as providing loans for future securitizations. There can be no assurances, however, that any such securitization will be completed in the future. Securitization of commercial and multi-family real estate loans is significantly less standardized and streamlined than securitization of one- to four-family residential mortgage loans. Management believes that it has the infrastructure in place to safely diversify its product line into this niche market. Two of the Company's senior executive officers, Daniel L. Perl and Joseph R. L. Passerino, have combined experience of approximately 27 years in commercial and multi-family real estate lending and have developed substantial relationships with commercial and multi-family real estate originators throughout the United States. In addition, the Company works primarily with a select group of approximately 100 mortgage 68 brokers nationwide with specifically delineated credentials. The Company also works with two correspondents and expects to expand that number of approved correspondents to 15 in the near future. Commercial and multi-family real estate loan correspondents in the Company's network must have a net worth of at least $1.0 million, a two to three year history of funding and servicing multi-family and commercial real estate loans and errors and omissions insurance of at least $1.0 million. In addition, an on-site inspection of the facilities of each of these correspondents is conducted by the Bank's Senior Vice President. Where loans are originated by other than this pre-approved group of correspondents, the Company will underwrite the loan. The Company also works with a contract appraiser with nationwide experience in appraising commercial and multi-family real estate loans who appraises or reviews the appraisals on all such properties. The Company's policy is not to make commercial or multi-family real estate loans to borrowers who are in bankruptcy, foreclosure, have loans more than 30 days delinquent or other combinations of credit weaknesses unacceptable to the Company. The Company targets high to medium credit quality borrowers. The Company's underwriting procedures provide that commercial real estate loans may be made in amounts up to 70% of the appraised value of the property depending on the borrower's creditworthiness. Multi-family real estate loans may be made in amounts up to 75% of the appraised value of the property. Commercial real estate loans and multi-family real estate loans may be either fixed rate or adjustable rate loans. These loans include prepayment penalties if repaid within the first three to five years. When evaluating a commercial or multi-family real estate loan, the Company considers the net operating income of the property and the borrower's expertise, credit history and personal cash flows. The Company has generally required that the properties securing commercial real estate and multi-family real estate loans have debt service coverage ratios (the ratio of net operating income to debt service) of at least 120%. The largest commercial real estate loan in the Company's held for sale portfolio at September 30, 1997 was $778,000 and is secured by an office building in Venice, California while the largest multi-family real estate loan in the Company's held for sale portfolio at September 30, 1997 was $709,000 secured by a 38 unit multi-family property located in Miami, Florida. At September 30, 1997 the Company's commercial real estate portfolio was $21.9 million, or 9.9% of total gross loans, $14.2 million of which were held for sale. The Company's multi-family real estate portfolio at that same date was $16.4 million, or 7.4% of total gross loans, $16.0 million of which were held for sale. Repayment of multi-family and commercial real estate loans generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. The Company attempts to offset the risks associated with multi-family and commercial real estate lending by primarily lending to individuals who will be actively involved in the management of the property and generally to individuals who have proven management experience, and by making such loans with lower loan-to-value ratios than one- to four- family loans. See "Risk Factors Related to the Company--Multi-family and Commercial Real Estate Risks." HISTORICAL AND LOCAL LENDING PORTFOLIO The Company's portfolio of loans held for investment (the "historical loan portfolio") was primarily originated prior to 1994. Such loans generally consist of adjustable rate one- to four-family loans and adjustable rate multi-family and commercial real estate loans. The Company's gross historical loan portfolio has decreased in size from $48.0 million at December 31, 1994 to $38.5 million at December 31, 1996 and was $34.0 million at September 30, 1997. The largest loan in the Company's held for investment portfolio at September 30, 1997 was $461,000 secured by a hotel located in San Bernardino, California. At September 30, 1997, substantially all of the Company's historical loan portfolio was secured by properties located in California. For a discussion of loss experience on the historical and local lending portfolio, see "--Lending Overview--Allowance for Loan Losses" and "--Non-Accrual and Past Due Loans." CONSUMER AND OTHER LENDING The Company's consumer and other loans generally consist of overdraft lines of credit, commercial business loans and unsecured personal loans. At September 30, 1997, the Company's consumer and other loan portfolio 69 was $6.9 million or 3.1% of total gross loans. Of this amount, $6.7 million consisted of unsecured home improvement loans purchased from a single originator in March 1997. These loans were purchased as part of management's evaluation of new product lines for possible future growth. LOAN SERVICING Through December 31, 1993, the Company's loan servicing portfolio consisted solely of loans originated directly by the Company and retained for investment or sold, primarily as participations, to others. Commencing in January of 1994 through June of 1995, the Company purchased mortgage servicing rights to FNMA and FHLMC loans in order to expand the size of its loan servicing department and to further develop its loan servicing capabilities. The entire FHLMC servicing portfolio was resold in December 1995. Effective July 1, 1995, with the adoption of SFAS No. 122, which required the Company to capitalize the value of originated mortgage servicing rights, the Company began to retain substantially all servicing rights on loans sold. In addition, the Company intends to retain the servicing rights to the loans it securitizes. The pooling and servicing agreements related to the securitizations completed to date contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates which, if exceeded, would allow the termination of the Company's right to service the related loans. See "Risk Factors Related to the Company--Risks Related to Mortgage Servicing Rights and Residual Assets." Servicing rights with an allocated fair value of $722,000, $1.6 million, and $2.0 million were retained in the securitizations completed during the fourth quarter of 1996, the first quarter of 1997, and the third quarter of 1997, respectively. At September 30, 1997, the Company serviced $554.8 million of loans of which $334.1 million were serviced for others. The loan servicing and collections department has increased in size from four persons at December 31, 1994 to 20 persons at September 30, 1997. Within this department, personnel have experience in both sub-prime lending and also in managing the Company's non-performing loans in its historical local lending portfolio. This experience was gained in part during the economic downturn in Southern California and resulted in a low loss experience for the Company. See "--Lending Overview--Allowance for Loan Losses." The head of the servicing department has more than 24 years of experience in loan servicing and collections, including responsibility for a $10.0 billion portfolio of approximately 255,000 loans and a staff of 70 people. Substantial space in the Riverside, California facility has been allocated to the loan servicing and collections operations upon the opening of the newer Riverside facility and the transfer of the origination and administrative functions to this facility during the third quarter of 1997. In order to provide the infrastructure to increase productivity, the Company is in the process of enhancing its telephonic systems by purchasing a power dialing system, which is intended to become operational in the first quarter of 1998. In addition, the Company intends to enhance its computer systems by adding imaging, which creates an image of each document in a loan file accessible through the Company's wide area network, which is expected to become operational in the second quarter of 1998. The Company's loan servicing activities include (i) the collection and remittance of mortgage loan payments, (ii) accounting for principal and interest and other collections and expenses, (iii) holding and disbursing escrow or impounding funds for real estate taxes and insurance premiums, (iv) inspecting properties when appropriate, (v) contacting delinquent borrowers, and (vi) acting as fiduciary in foreclosing and disposing of collateral properties. The Company receives a servicing fee for performing these services for others. While most of the Company's servicing portfolio is generated through its origination and purchase activities, when economically attractive, the Company has, from time to time, made bulk purchases of mortgage servicing rights from financial institutions. The Company does not intend to make significant bulk purchases of servicing rights in the near future but may do so depending on market opportunities. The mortgage loans underlying the servicing rights retained by the Company have been historically underwritten by the Company. These servicing rights were either originated by mortgage brokers or purchased through various programs from correspondents or junior correspondents. The costs to acquire servicing are based on the present value of the estimated future servicing revenues, net of the expected servicing expenses, for each acquisition. Major factors impacting the value of servicing rights include contractual service fee rates, projected mortgage prepayment speed, projected 70 delinquencies and foreclosures, projected escrow, agency and fiduciary funds to be held in connection with such servicing and the projected benefit to be realized from such funds. See "Risk Factors Related to the Company--Risks Related to Mortgage Servicing Rights and Residual Assets." In addition to weekly loan delinquency meetings which are attended by members of senior management, the loan committee of the Board of Directors generally performs a monthly review of all delinquent loans 90 days or more past due. In addition, management reviews on an ongoing basis all delinquent loans. The procedures taken by the Company with respect to delinquencies vary depending on the nature of the loan and period of delinquency. When a borrower fails to make a required payment on a loan, the Company takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Company generally sends the borrower a written notice of non-payment within ten days after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. If the loan is still not brought current, the Company generally sends a notice of the intent to foreclose 25 days after the loan is first past due. If the borrower does not cure the delinquency and it becomes necessary for the Company to take legal action, which typically occurs after a loan is delinquent at least 30 days or more, the Company will commence foreclosure proceedings against any real property that secures the loan. If a loan remains delinquent on the 45th day, a property inspection will be made to verify occupancy, determine the condition of the property and as an attempt to contact the borrower in person. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. The Company's procedures for repossession and sale of consumer collateral are subject to various requirements under state consumer protection laws. Regulation and practices in the United States regarding the liquidation of properties (e.g., foreclosure) and the rights of the mortgagor in default vary greatly from state to state. Loans originated or purchased by the Company are secured by mortgages, deeds of trust, trust deeds, security deeds or deeds to secure debt, depending upon the prevailing practice in the state in which the property securing the loan is located. Depending on local law, foreclosure is effected by judicial action and/or non-judicial sale, and is subject to various notice and filing requirements. If foreclosure is effected by judicial action, the foreclosure proceedings may take several months. In general, the borrower, or any person having a junior encumbrance on the real estate, may cure a monetary default by paying the entire amount in arrears plus other designated costs and expenses incurred in enforcing the obligation during a statutorily prescribed reinstatement period. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys' fees, which may be recovered by a lender. There are a number of restrictions that may limit the Company's ability to foreclose on a property. A lender may not foreclose on the property securing a junior mortgage loan unless it forecloses subject to each senior mortgage, in which case the junior lender or purchaser at such a foreclosure sale will take title to the property subject to the lien securing the amount due on the senior mortgage. Moreover, if a borrower has filed for bankruptcy protection, a lender may be stayed from exercising its foreclosure rights. Also, certain states provide a homestead exemption that may restrict the ability of a lender to foreclose on residential property. 71 Credit Quality of Servicing Portfolio. The following table illustrates the Bank's delinquency and default experience with respect to its loan servicing portfolio:
AT SEPTEMBER 30, 1997 --------------------------------------- NUMBER OF % OF % OF LOANS/ LOANS PRINCIPAL SERVICING PROPERTIES SERVICED BALANCE PORTFOLIO ---------- -------- --------- --------- (DOLLARS IN THOUSANDS) Delinquency percentage(1)(2) 30-59 days...... 226 1.85% $ 5,393 0.97% 60-89 days...... 91 0.74 932 0.17 90 days and over............ 109 0.89 858 0.15 ------ ---- --------- ---- Total delinquency..... 426 3.48% $ 7,183 1.29 ====== ==== ========= ==== Default percentage(3) Foreclosure..... 77 0.63% $ 8,182 1.47% Bankruptcy...... 28 0.23 1,840 0.33 Real estate owned(4)........ 22 0.18 2,379 0.43 ------ ---- --------- ---- Total default... 127 1.04% $ 12,401 2.24% ====== ==== ========= ==== Total servicing portfolio at period end....... 12,229 $ 554,779 ====== ========= AT DECEMBER 31, ------------------------------------------------------------------------------- 1996 1995 --------------------------------------- --------------------------------------- NUMBER OF % OF % OF NUMBER OF % OF % OF LOANS/ LOANS PRINCIPAL SERVICING LOANS/ LOANS PRINCIPAL SERVICING PROPERTIES SERVICED BALANCE PORTFOLIO PROPERTIES SERVICED BALANCE PORTFOLIO ---------- -------- --------- --------- ---------- -------- --------- --------- (DOLLARS IN THOUSANDS) Delinquency percentage(1)(2) 30-59 days...... 10 0.26% $ 860 0.36% 22 0.74% $ 2,118 0.83% 60-89 days...... -- -- -- -- 9 0.30 482 0.19 90 days and over............ 3 0.08 143 0.06 10 0.33 762 0.30 ----- ---- -------- ---- ----- ---- -------- ---- Total delinquency..... 13 0.34% $ 1,003 0.42% 41 1.37% $ 3,362 1.32% ===== ==== ======== ==== ===== ==== ======== ==== Default percentage(3) Foreclosure..... 56 1.48% $ 6,279 2.64% 7 0.23% $ 793 0.32% Bankruptcy...... 9 0.24 778 0.33 2 0.07 288 0.11 Real estate owned(4)........ 9 0.24 1,197 0.50 8 0.27 1,221 0.48 ----- ---- -------- ---- ----- ---- -------- ---- Total default... 74 1.96% $ 8,254 3.47% 17 0.57% $ 2,301 0.91% ===== ==== ======== ==== ===== ==== ======== ==== Total servicing portfolio at period end....... 3,781 $237,958 2,986 $253,711 ===== ======== ===== ========
- ---- (1) The delinquency percentage represents the number and outstanding principal balance of loans for which payments are contractually past due, exclusive of loans in foreclosure, bankruptcy, real estate owned or forbearance. (2) The past due period is based on the actual number of days that a payment is contractually past due. A loan as to which a monthly payment was due 60-89 days prior to the reporting period is considered 60-89 days past due, etc. (3) The default percentage represents the number and outstanding principal balance of loans in foreclosure, bankruptcy or real estate owned. (4) An "REO Property" is a property acquired and held as a result of foreclosure or deed in lieu of foreclosure. 72 LENDING OVERVIEW Loan Portfolio Composition. At September 30, 1997, the Company's gross loans outstanding totalled $220.7 million, of which $186.6 million, or 84.6%, were held for sale and $34.0 million, or 15.4%, were held for investment. The types of loans that the Company may originate are subject to federal and state law and regulations. Interest rates charged by the Company on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies. The following table sets forth the composition of the Company's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.
AT DECEMBER 31, AT SEPTEMBER 30, ------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 ----------------- ---------------- ---------------- --------------- --------------- --------------- PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT OF OF OF OF OF OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Real estate(1): Residential: One- to four- family.......... $175,386 79.48% $54,275 78.67% $54,007 84.04% $53,755 82.62% $55,841 83.01% $53,816 81.68% Multi-family.... 16,416 7.44 4,752 6.89 2,412 3.75 2,685 4.12 2,296 3.41 2,338 3.55 Commercial........ 21,866 9.91 9,659 14.00 7,522 11.71 8,131 12.50 8,389 12.47 8,930 13.55 Other loans: Loans secured by deposit accounts.. 128 0.06 177 0.25 186 0.29 213 0.33 396 0.59 381 0.58 Unsecured commercial loans.. 64 0.03 67 0.10 70 0.11 197 0.30 190 0.28 224 0.34 Unsecured consumer loans............. 6,805 3.08 65 0.09 63 0.10 84 0.13 162 0.24 200 0.30 -------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total gross loans........... $220,665 100.00% 68,995 100.00% 64,260 100.00% 65,065 100.00% 67,274 100.00% 65,889 100.00% -------- ====== ------- ====== ------- ====== ------- ====== ------- ====== ------- ====== Less (plus): Deferred loan origination (costs) fees and (premiums) discounts......... (4,882) (543) (298) 56 109 209 Allowance for estimated loan losses............ 1,859 1,625 1,177 832 436 308 -------- ------- ------- ------- ------- ------- Loans receivable, net............. $223,688 $67,913 $63,381 $64,177 $66,729 $65,372 ======== ======= ======= ======= ======= =======
- ---- (1) Includes second trust deeds. 73 Loan Maturity. The following table shows the contractual maturity of the Bank's gross loans at September 30, 1997. There were $186.6 million of loans held for sale at September 30, 1997. The table does not reflect prepayment assumptions.
AT SEPTEMBER 30, 1997 ------------------------------------------------ TOTAL ONE- TO MULTI- OTHER LOANS FOUR-FAMILY FAMILY COMMERCIAL LOANS RECEIVABLE ----------- ------- ---------- ------ ---------- (DOLLARS IN THOUSANDS) Amounts due: One year or less............. $ 11,883 $ -- $ 215 $ 227 $ 12,325 After one year: More than one year to three years...................... 1,282 -- 1,087 401 2,770 More than three years to five years................. 1,283 627 3,992 2,557 8,459 More than five years to 10 years...................... 1,553 1,668 3,521 3,441 10,183 More than 10 years to 20 years...................... 40,721 1,155 3,005 59 44,940 More than 20 years.......... 118,664 12,966 10,046 312 141,988 -------- ------- ------- ------ -------- Total amount due.......... $175,386 $16,416 $21,866 $6,997 $220,665 ======== ======= ======= ====== ======== Less (plus): Unamortized discounts (pre- miums), net................ (4,933) -- (1) -- (4,934) Deferred loan origination fees (costs)............... (289) 170 171 -- 52 Allowance for estimated loan losses..................... 1,433 66 151 209 1,859 -------- ------- ------- ------ -------- Total loans, net.......... 179,175 16,180 21,545 6,788 223,688 Loans held for sale, net.... 154,992 15,858 14,023 6,682 191,555 -------- ------- ------- ------ -------- Loans held for investment, net........................ $ 24,183 $ 322 $ 7,522 $ 106 $ 32,133 ======== ======= ======= ====== ========
The following table sets forth at September 30, 1997, the dollar amount of gross loans receivable contractually due after September 30, 1998, and whether such loans have fixed interest rates or adjustable interest rates. The Company's adjustable-rate mortgage loans require that any payment adjustment resulting from a change in the interest rate be made to both the interest and payment in order to result in full amortization of the loan by the end of the loan term, and thus, do not permit negative amortization.
DUE AFTER SEPTEMBER 30, 1998 ------------------------------ FIXED ADJUSTABLE TOTAL -------- --------------------- (DOLLARS IN THOUSANDS) Real estate loans: Residential: One- to four-family........................ $ 69,558 $ 93,945 $ 163,503 Multi-family............................... 2,555 13,861 16,416 Commercial.................................. 7,625 14,026 21,651 Other loans................................. 6,753 17 6,770 -------- --------- --------- Total gross loans receivable............. $ 86,491 $ 121,849 $ 208,340 ======== ========= =========
74 The following tables set forth the Company's loan originations, purchases, sales and principal repayments for the periods indicated:
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30, DECEMBER 31, ----------------- -------------------------- 1997 1996 1996 1995 1994 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Gross loans(1): Beginning balance................ $ 68,995 $ 64,260 $ 64,260 $ 65,065 $ 67,274 Loans originated: One- to four-family(2)......... 214,722 61,481 100,745 38,259 34,740 Multi-family................... 11,373 1,613 2,976 -- 85 Commercial..................... 10,074 5,546 7,172 -- 266 Other loans.................... 581 117 126 358 452 -------- -------- -------- -------- -------- Total loans originated....... 236,750 68,757 111,019 38,617 35,543 Loans purchased(3).............. 196,658 79,632 111,534 96,155 37,272 -------- -------- -------- -------- -------- Total loans originated and purchased..................... 433,408 148,389 222,553 134,772 72,815 -------- -------- -------- -------- -------- Total........................ 502,403 212,649 286,813 199,837 140,089 Less: Principal repayments............ 3,185 7,028 9,184 6,719 7,440 Sales of loans.................. 73,089 140,755 154,620 126,875 65,713 Securitizations of loans........ 203,968 -- 51,944 -- -- Transfer to REO................. 1,496 1,983 2,070 1,983 1,871 -------- -------- -------- -------- -------- Total loans.................. 220,665 62,883 68,995 64,260 65,065 Loans held for sale............. 186,638 24,426 30,454 21,397 17,097 -------- -------- -------- -------- -------- Ending balance loans held for investment...................... $ 34,027 $ 38,457 $ 38,541 $ 42,863 $ 47,968 ======== ======== ======== ======== ========
- -------- (1) Gross loans includes loans held for investment and loans held for sale. (2) Includes second trust deeds. (3) Loans purchased consist predominantly of one- to four-family residential Liberator Series and Portfolio Series loans. Delinquencies and Classified Assets. Federal regulations and the Bank's Classification of Assets Policy require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated the OTS internal asset classifications as a part of its credit monitoring system. The Bank currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "Special Mention." When an insured institution classifies one or more assets, or portions thereof, as Substandard or Doubtful, under current OTS policy the Bank is required to consider establishing a general valuation allowance in an amount deemed prudent by management. The general valuation allowance, which is a regulatory term, represents 75 a loss allowance which has been established to recognize the inherent credit risk associated with lending and investing activities, but which, unlike specific allowances, has not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as "Loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. As a result of the declines in local and regional real estate market values and the significant losses experienced by many financial institutions in prior years, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of the examination of institutions by the OTS and the FDIC. While the Bank believes that it has established an adequate allowance for estimated loan losses, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to materially increase at that time its allowance for estimated loan losses, thereby negatively affecting the Bank's financial condition and earnings at that time. Although management believes that an adequate allowance for estimated loan losses has been established, actual losses are dependent upon future events and, as such, further additions to the level of allowances for estimated loan losses may become necessary. The Bank's Internal Asset Review Committee reviews and classifies the Bank's assets quarterly and reports the results of its review to the Board of Directors. The Bank classifies assets in accordance with the management guidelines described above. REO is classified as Substandard. The following table sets forth information concerning loans, REO and total assets classified as substandard at September 30, 1997. At September 30, 1997 the Bank had $1.0 million of assets classified as Special Mention, $5.1 million of assets classified as Substandard, no assets classified as Doubtful and $246,000 of assets classified as Loss. As of September 30, 1997, assets classified as Special Mention include four loans totaling $506,000 secured by one- to four- family residential properties and three commercial real estate loans totaling $488,000. At September 30, 1997, the largest loan classified as Special Mention had a loan balance of $297,000 and is secured by commercial real estate. As set forth below, as of September 30, 1997, assets classified as Substandard, Doubtful and Loss include 162 loans totaling $4.3 million.
AT SEPTEMBER 30, 1997 -------------------------------------------------------------------------------------- TOTAL SUBSTANDARD, DOUBTFUL LOANS REO AND LOSS ASSETS --------------------------- ----------------------------- ---------------------------- GROSS NET NUMBER GROSS NET NUMBER OF GROSS NET NUMBER BALANCE BALANCE(1) OF LOANS BALANCE BALANCE(1) PROPERTIES BALANCE BALANCE(1) OF ASSETS ------- ---------- -------- ------- ---------- ---------- ------- ---------- --------- (DOLLARS IN THOUSANDS) Residential: One- to four-family.... $3,541 $3,313 44 $1,002 $ 983 12 $4,543 $4,296 56 Multi-family........... 47 47 1 48 48 1 95 95 2 Commercial.............. 131 131 1 -- -- -- 131 131 1 Other loans............. 618 618 116 -- -- -- 618 618 116 ------ ------ --- ------ ------ --- ------ ------ --- Total loans........... $4,337 $4,109 162 $1,050 $1,031 13 $5,387 $5,140 175 ====== ====== === ====== ====== === ====== ====== ===
- -------- (1) Net balances are reduced for specific loss allowances established against substandard loans and real estate. 76 Non-Accrual and Past-Due Loans. The following table sets forth information regarding non-accrual loans, troubled-debt restructurings and REO in the Company's loans held for investment. There was one troubled-debt restructured loan within the meaning of SFAS 15, and 13 REO properties at September 30, 1997. Until September 30, 1996 it was the policy of the Company to cease accruing interest on loans at the time foreclosure proceedings commenced, which typically occurred when a loan is 45 days past due or possibly longer depending on the circumstances, which period will not exceed 90 days past due. Subsequent to March 31, 1996, the Company adopted a policy to cease accruing interest on loans 90 days or more past due. For the nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively, the amount of interest income that would have been recognized on nonaccrual loans if such loans had continued to perform in accordance with their contractual terms was $272,000, $100,000, $150,000, $66,000, $106,000, $117,000 and $84,000, none of which was recognized. For the same periods, the amount of interest income recognized on troubled debt restructurings was $9,000, $9,000, $12,000, $11,000, $10,000, $1,000, and $0.
AT SEPTEMBER 30, AT DECEMBER 31, ------------------ -------------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------- -------- ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Non-accrual loans: Residential real estate: One- to four- family............. $ 2,332 $ 1,837 $2,361 $1,305 $1,766 $1,919 $1,606 Multi-family........ -- -- 45 -- -- -- -- Commercial............ 131 -- -- 82 78 197 283 Other loans........... 610 10 10 10 45 62 2 -------- -------- ------ ------ ------ ------ ------ Total............. 3,073 1,847 2,416 1,397 1,889 2,178 1,891 REO, net(1)............. 975 991 561 827 555 1,772 1,377 -------- -------- ------ ------ ------ ------ ------ Total non- performing assets........... $ 4,048 $ 2,838 $2,977 $2,224 $2,444 $3,950 $3,268 ======== ======== ====== ====== ====== ====== ====== Restructured loans...... $ 131 $ 131 $ 131 $ 131 $ -- $ 15 $ -- Classified assets, gross.................. 5,387 4,603 4,829 3,929 3,951 4,165 4,827 Allowance for estimated loan losses as a percent of gross loans receivable(2).......... 0.84% 1.63% 2.36% 1.83% 1.28% 0.65% 0.47% Allowance for estimated loan losses as a percent of total non- performing loans(3).... 60.49 55.66 67.26 84.25 44.04 20.02 16.29 Non-performing loans as a percent of gross loans receivable(2)(3)....... 1.39 2.94 3.50 2.17 2.90 3.24 2.87 Non-performing assets as a percent of total assets(3).............. 1.38 3.36 2.86 3.00 3.42 5.05 4.15
- -------- (1) REO balances are shown net of related loss allowances. (2) Gross loans include loans receivable held for investment and loans receivable held for sale. (3) Non-performing assets consist of non-performing loans and REO. Prior to April 1, 1996, non-performing loans consisted of all loans 45 days or more past due and all other non-accrual loans. Following March 31, 1996, non- performing loans consisted of all loans 90 days or more past due and all other non-accrual loans. 77 The following table sets forth delinquencies in the Company's loan portfolio as of the dates indicated:
AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996 -------------------------------------- ------------------------------------- 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE ------------------- ------------------ ------------------ ------------------ PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER OF BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS --------- --------- -------- --------- -------- --------- -------- --------- (DOLLARS IN THOUSANDS) One- to four-family..... 5 $ 645 27 $2,254 3 $354 21 $2,361 Multi-family............ -- -- -- -- -- -- 1 45 Commercial.............. -- -- 2 149 -- -- -- -- Other loans............. 85 449 110 670 -- -- 1 10 --- ------ --- ------ --- ---- --- ------ Total................. 90 $1,094 139 $3,073 3 $354 23 $2,416 === ====== === ====== === ==== === ====== Delinquent loans to to- tal gross loans........ 0.50% 1.39% 0.51% 3.50% ====== ====== ==== ======
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994 ------------------------------------- ------------------------------------- 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE ------------------ ------------------ ------------------ ------------------ PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS -------- --------- -------- --------- -------- --------- -------- --------- (DOLLARS IN THOUSANDS) One- to four-family..... 8 $446 13 $1,286 5 $375 8 $1,728 Multi-family............ -- -- -- -- -- -- -- -- Commercial.............. -- -- -- -- -- -- 1 77 Other loans............. -- -- 1 10 -- -- -- -- --- ---- --- ------ --- ---- --- ------ Total................. 8 $446 14 $1,296 5 $375 9 $1,805 === ==== === ====== === ==== === ====== Delinquent loans to to- tal gross loans........ 0.69% 2.01% 0.58% 2.78% ==== ====== ==== ======
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable. The allowance is based upon a number of factors, including current economic conditions, actual loss experience and industry trends. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additional provisions for loan losses based upon information available at the time of the review. As of September 30, 1997, the Company's allowance for loan losses was 0.84% of gross loans compared to 2.36% as of December 31, 1996. The Company had non-accrual loans of $3.1 million and $2.4 million at September 30, 1997 and December 31, 1996, respectively. The Company will continue to monitor and modify its allowances for loan losses as conditions dictate. 78 The following table sets forth activity in the Company's allowance for loan losses for the periods set forth in the table.
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31, -------------------- ------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- --------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Balance at beginning of period................. $ 1,625 $ 1,177 $ 1,177 $ 832 $ 436 $ 308 $ 299 Provision for loan losses................. 900 359 963 1,194 1,306 404 129 Charge-offs: Real Estate: One- to four- family............. 673 577 668 736 771 301 60 Multi-family........ -- 45 45 -- -- -- -- Commercial.......... -- -- 11 111 47 -- -- Other loans........... -- 10 10 67 95 -- 60 --------- -------- ------- ------- ------- ------- ------- Total............. 673 632 734 914 913 301 120 Recoveries.............. 7 124 219 65 3 25 -- --------- -------- ------- ------- ------- ------- ------- Balance at end of period................. $ 1,859 $ 1,028 $ 1,625 $ 1,177 $ 832 $ 436 $ 308 ========= ======== ======= ======= ======= ======= ======= Average net loans outstanding............ $ 143,487 $ 69,944 $72,556 $65,521 $65,566 $68,511 $62,522 ========= ======== ======= ======= ======= ======= ======= Net charge-offs to average net loans outstanding............ 0.46% 0.73% 0.71% 1.30% 1.39% 0.40% 0.19%
79 The following table sets forth the amount of the Company's allowance for loan losses, the percent of allowance for loan losses to total allowance and the percent of gross loans to total gross loans in each of the categories listed at the dates indicated.
AT SEPTEMBER 30, ----------------------------------------------------------------- 1997 1996 -------------------------------- -------------------------------- PERCENT OF PERCENT OF GROSS LOANS IN GROSS LOANS IN PERCENT OF EACH PERCENT OF EACH ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS ------ ---------- -------------- ------ ---------- -------------- (DOLLARS IN THOUSANDS) One- to four-family..... $1,433 77.08% 79.48% $ 887 86.28% 81.05% Multi-family............ 66 3.55 7.44 20 1.95 5.41 Commercial.............. 151 8.13 9.91 112 10.89 13.00 Other................... 209 11.24 3.17 9 0.88 0.54 ------ ------ ------ ------ ------ ------ Total allowance for loan losses........... $1,859 100.00% 100.00% $1,028 100.00% 100.00% ====== ====== ====== ====== ====== ======
AT DECEMBER 31, --------------------------------------------------------------------------------- 1996 1995 1994 -------------------------- -------------------------- -------------------------- PERCENT PERCENT PERCENT OF GROSS OF GROSS OF GROSS LOANS IN LOANS IN LOANS IN EACH EACH EACH PERCENT OF CATEGORY PERCENT OF CATEGORY PERCENT OF CATEGORY ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL TO TOTAL GROSS TO TOTAL GROSS TO TOTAL GROSS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS ------ ---------- -------- ------ ---------- -------- ------ ---------- -------- (DOLLARS IN THOUSANDS) One- to four- family........... $1,462 89.97% 78.67% $1,001 85.05% 84.04% $604 72.60% 82.62% Multi-family..... 20 1.23 6.89 14 1.19 3.75 10 1.20 4.12 Commercial....... 124 7.63 14.00 143 12.15 11.71 164 19.71 12.5 Other............ 19 1.17 0.44 19 1.61 0.50 54 6.49 0.76 ------ ------ ------ ------ ------ ------ ---- ------ ------ Total allowance for loan losses.......... $1,625 100.00% 100.00% $1,177 100.00% 100.00% $832 100.00% 100.00% ====== ====== ====== ====== ====== ====== ==== ====== ====== ------------------------------------------------------ 1993 1992 -------------------------- -------------------------- PERCENT PERCENT OF GROSS OF GROSS LOANS IN LOANS IN EACH EACH PERCENT OF CATEGORY PERCENT OF CATEGORY ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL TO TOTAL GROSS TO TOTAL GROSS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS ------ ---------- -------- ------ ---------- -------- One- to four- family........... $287 65.83% 83.01% $225 73.05% 81.68% Multi-family..... 10 2.29 3.41 6 1.95 3.55 Commercial....... 98 22.48 12.47 57 18.51 13.55 Other............ 41 9.40 1.11 20 6.49 1.22 ---- ------ ------ ---- ------ ------ Total allowance for loan losses.......... $436 100.00% 100.00% $308 100.00% 100.00% ==== ====== ====== ==== ====== ======
80 REO At September 30, 1997, the Company had $975,000 of REO, net of allowances. Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of fair value or the balance of the loan at the date of foreclosure through a charge to the allowance for estimated loan losses. After foreclosure, valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its fair value less estimated cost to sell. It is the policy of the Company to obtain an appraisal on all REO at the time of possession and every six months thereafter. INVESTMENT ACTIVITIES Federally chartered savings institutions, such as the Bank, have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers' acceptances, and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment- grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Additionally, the Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. See "Regulation--Federal Savings Institution Regulation--Liquidity." Historically, the Bank has maintained liquid assets above the minimum OTS requirements and at a level considered to be adequate to meet its normal daily activities. The investment policy of the Company as established by the Board of Directors attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Company's lending activities. Specifically, the Company's policies generally limit investments to government and federal agency-backed securities and non-government guaranteed securities, including corporate debt obligations, that are investment grade. The Company's policies provide the authority to invest in marketable equity securities meeting the Company's guidelines and in mortgage-backed securities guaranteed by the U.S. government and agencies thereof and other financial institutions. At September 30, 1997 the Company had $9,000 in its mortgage-backed securities portfolio, all of which were insured or guaranteed by the FHLMC and are being held-to-maturity. The Company may increase its investment in mortgage-backed securities in the future depending on its liquidity needs and market opportunities. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby reducing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. At September 30, 1997, the residual assets, which resulted from the Company's asset securitizations conducted during the fourth quarter of 1996, the first quarter of 1997 and the third quarter of 1997, of $24.5 million were classified as trading securities. For regulatory reasons, the residual assets and restricted cash are held by the Parent Company. Future residuals and related assets generated by asset securitizations will be held by the Bank only until they can be sold to the Company or disposed of in some other transaction. The residual assets and any future residuals generated by future asset securitizations and held by the Company will be marked to market on a quarterly basis with unrealized gains and losses recorded in operations. See "Risk Factors Related to the Company--Dependence on Asset Securitizations and Impact on Quarterly Operating Results" and "--Loan Sales and Asset Securitizations." 81 The following table sets forth certain information regarding the carrying and fair values of the Company's securities at the dates indicated. There were no securities available-for-sale at the dates indicated:
AT DECEMBER 31, AT SEPTEMBER 30, ----------------------------------------------- 1997 1996 1995 1994 ------------------ --------------- --------------- --------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE --------- -------- -------- ------ -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Securities: Held-to-maturity: U.S. Treasury and other agency securities........ $ 8,056 $ 8,070 $8,827 $8,785 $2,689 $2,689 $2,846 $2,838 Mortgage-backed securities........ 9 9 10 10 11 11 13 13 -------- -------- ------ ------ ------ ------ ------ ------ Total securities held-to- maturity........ $ 8,065 $ 8,079 $8,837 $8,795 $2,700 $2,700 $2,859 $2,851 ======== ======== ====== ====== ====== ====== ====== ======
The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company's securities as of September 30, 1997. There were no securities available for sale at September 30, 1997.
AT SEPTEMBER 30, 1997 ----------------------------------------------------------------------------------------- MORE THAN MORE THAN ONE YEAR ONE YEAR TO FIVE YEARS MORE THAN OR LESS FIVE YEARS TO TEN YEARS TEN YEARS TOTAL ----------------- ----------------- ----------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Securities: Held-to-maturity: U.S. Treasury and other agency securities..... $4,008 5.88% $2,998 6.00% $ -- -- % $ -- -- % $7,006 5.93% Mortgage-backed securities............ -- -- -- 9 6.88 9 6.88 ------ ------ ----- ----- ------ Total held-to- maturity............. 4,008 5.88% 2,998 6.00 -- 9 6.88 7,015 5.93 FHLB stock............. 1,050 -- -- -- 1,050 ------ ------ ----- ----- ------ Total securities held- to-maturity.......... $5,058 $2,998 $ -- $ 9 $8,065 ====== ====== ===== ===== ======
82 SOURCES OF FUNDS General. Deposits, lines of credit, loan repayments and prepayments, proceeds from sales and securitization of loans, cash flows generated from operations and borrowings are the primary sources of the Company's funds for use in lending, investing and for other general purposes. Deposits. The Company offers a variety of deposit accounts with a range of interest rates and terms. The Company's deposits consist of passbook savings, checking accounts, money market savings accounts and certificates of deposit. For the nine months ended September 30, 1997, certificates of deposit constituted 86.8% of total average deposits. The term of the fixed-rate certificates of deposit offered by the Company vary from 30 days to eighteen years and the offering rates are established by the Company on a weekly basis. Specific terms of an individual account vary according to the type of account, the minimum balance required, the time period funds must remain on deposit and the interest rate, among other factors. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. At September 30, 1997, the Company had $134.3 million of certificate accounts maturing in one year or less. The Company relies primarily on customer service and long-standing relationships with customers to attract and retain local deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Company's ability to attract and retain deposits. In addition, the Company seeks to attract deposits from outside of its market area by using nationwide advertising. In order to meet its liquidity needs for the purchase of loans, from time to time the Company offers above market interest rates on short term certificate accounts and may utilize brokered deposits. At September 30, 1997, the Company had no brokered deposits. Although the Company has a significant portion of its deposits in shorter term certificates of deposit, management monitors activity on the Company's certificate of deposit accounts and, based on historical experience, and the Company's current pricing strategy, believes that it will retain a large portion of such accounts upon maturity. Further increases in short-term certificate of deposit accounts, which tend to be more sensitive to movements in market interest rates than core deposits, may result in the Company's deposit base being less stable than if it had a large amount of core deposits which, in turn, may result in further increases in the Company's cost of deposits. Notwithstanding the foregoing, the Company believes that it will continue to have access to sufficient amounts of certificates of deposit accounts which, together with other funding sources, will provide it with the necessary level of liquidity to continue to implement its business strategies. The following table presents the deposit activity of the Company for the periods indicated:
FOR THE NINE MONTHS FOR THE YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, ---------------------- ------------------ 1997 1996 1996 1995 1994 ------- ------ ------- ------- ------- (DOLLARS IN THOUSANDS) Net deposits (withdrawals)... $68,761 $3,272 $15,700 $(1,329) $(8,880) Interest credited on deposit accounts.................... 5,368 2,519 2,476 3,175 2,561 ------- ------ ------- ------- ------- Total increase (decrease) in deposit accounts...... $74,129 $5,791 $18,176 $1,846 $(6,319) ======= ====== ======= ======= =======
At September 30, 1997, the Company had $44.5 million in certificate accounts in amounts of $100,000 or more maturing as follows:
CERTIFICATE ACCOUNTS OF CERTIFICATE ACCOUNTS OF $100,000 TO $499,000 $500,000 OR GREATER ---------------------------- --------------------------- WEIGHTED WEIGHTED MATURITY PERIOD AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE --------------- ------------- -------------- ------------ -------------- (DOLLARS IN THOUSANDS) Three months or less.... $ 7,873 5.91% $ -- -- % Over three through 12 months................. 32,169 6.00 1,000 6.20 Over 12 months.......... 3,448 6.01 -- -- ------- ------ Total................. $43,490 5.99 $1,000 6.20% ======= ======
83 The following table sets forth the distribution of the Company's average deposit accounts for the periods indicated and the weighted average interest rates on each category of deposits presented. For balances and weighted average interest rates at September 30, 1997 and December 31, 1996 and 1995, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Average Balance Sheets," and "Notes to Financial Statements" provided elsewhere herein.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31, -------------------------- ----------------------------------------------------------------------------- 1997 1996 1995 1994 -------------------------- ------------------------- ------------------------- ------------------------- PERCENT PERCENT PERCENT PERCENT OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE -------- -------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- (DOLLARS IN THOUSANDS) Passbook accounts......... $ 4,027 3.01% 2.09% $ 4,401 6.03% 2.09% $ 5,090 7.53% 2.50% $ 7,048 10.13% 2.23% Money market accounts......... 2,978 2.23 3.00 4,233 5.80 2.79 5,493 8.12 2.62 6,512 9.36 2.50 Checking accounts......... 10,691 7.99 2.51 7,048 9.65 1.59 6,434 9.51 1.43 6,180 8.88 1.54 -------- ------ ------- ------ ------- ------ ------- ------ Total........... 17,696 13.23 2.58 15,682 21.48 2.05 17,017 25,16 2.13 19,740 28.37 2.10 Certificate accounts: Three months or less............ 18,631 13.93% 5.50 3,994 5.47 5.66 11,570 17.11 5.09 16,952 24.36 3.60 Four through 12 months.......... 74,001 55.34 5.99 36,519 50.01 5.23 20,762 30.71 5.44 21,768 31.28 4.19 13 through 36 months.......... 17,578 13.14 5.63 10,204 13.98 6.25 11,188 16.54 5.93 7,218 10.37 5.11 37 months or greater......... 5,825 4.36 6.21 6,616 9.06 6.36 7,088 10.48 6.32 3,913 5.62 5.86 -------- ------ ------- ------ ------- ------ ------- ------ Total certificate accounts........ 116,035 86.77 5.87 57,333 78.52 5.57 50,608 74.84 5.59 49,851 71.63 4.25 -------- ------ ------- ------ ------- ------ ------- ------ Total average deposits......... $133,731 100.00% 5.42 $73,015 100.00% 4.81 $67,625 100.00% 4.72 $69,591 100.00% 3.64 ======== ====== ======= ====== ====== ======= ======
84 The following table presents, by various rate categories, the amount of certificate accounts outstanding at the dates indicated and the periods to maturity of the certificate accounts outstanding at September 30, 1997.
PERIOD TO MATURITY FROM SEPTEMBER 30, 1997 AT DECEMBER 31, ------------------------------------------------------------------------------- ----------------------- ONE YEAR OVER ONE TO OVER TWO TO OVER THREE TO OVER FOUR TO MORE THAN OR LESS TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS FIVE YEARS TOTAL 1996 1995 1994 -------- ----------- ----------- ------------- ------------ ---------- -------- ------- ------- ------- (DOLLARS IN THOUSANDS) Certificate accounts: 0 to 4.00%........ $ -- $ -- $ -- $-- $-- $-- $ -- $ -- $ 477 $ 9,674 4.01 to 5.00%..... 990 364 5 4 1 67 1,431 3,504 5,710 16,098 5.01 to 6.00%..... 66,238 2,404 368 277 474 102 69,863 60,145 32,298 15,282 6.01 to 7.00%..... 66,880 539 436 6 27 76 67,964 3,891 10,676 5,481 7.01 to 8.00%..... 173 512 481 164 42 251 1,623 1,890 2,641 1,487 8.01 to 9.00%..... -- -- -- -- -- -- -- -- -- 2 Over 9.01%........ -- -- -- -- -- -- -- -- -- -- -------- ------ ------ ---- ---- ---- -------- ------- ------- ------- Total........... $134,281 $3,819 $1,290 $451 $544 $496 $140,881 $69,430 $51,802 $48,044 ======== ====== ====== ==== ==== ==== ======== ======= ======= =======
85 Borrowings. From time to time the Bank has obtained advances from the FHLB as an alternative to retail deposit funds and internally generated funds and may do so in the future as part of its operating strategy. FHLB advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes. These advances are collateralized primarily by certain of the Bank's mortgage loans and mortgage-backed securities and secondarily by the Bank's investment in capital stock of the FHLB. See "Regulation--Federal Home Loan Bank System." Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time-to-time in accordance with the policies of the OTS and the FHLB. At September 30, 1997, the Bank had outstanding advances in the amount of $6.9 million from the FHLB. Both the Company and the Bank have the ability to enter into lines of credit to finance mortgage originations and purchases or for other corporate purposes. At September 30, 1997, the Bank's warehouse lines of credit consisted of two separate lines of credit aggregating $250.0 million, of which $54.6 million has been drawn at September 30, 1997. The lines of credit are secured by loans originated or purchased by the Company and range in interest rates from LIBOR plus 50 basis points to LIBOR plus 100 basis points. The Bank is in the process of negotiating a third warehouse line of credit in the amount of $250.0 million. In addition, the Company has a line of credit in the amount of $40.0 million secured by residual assets created by the Company's securitizations. All of the lines of credit are uncommitted and may be terminated by the lenders at will. See "Risk Factors Related to the Company-- Availability of Funding Sources." On March 14, 1997, the Bank issued Debentures in the aggregate principal amount of $10.0 million through the Debenture Offering. The Debentures will mature on March 15, 2004 and bear interest at the rate of 13.5% per annum, payable semi-annually. The Debentures qualify as supplementary capital under regulations of the OTS which capital may be used to satisfy the risk-based capital requirements in an amount up to 100% of the Bank's core capital. See "Regulation--Federal Savings Institution Regulation--Capital Requirements." By enhancing the Bank's capital position the Debentures provide support for the Bank's current operations. The Debentures are direct, unconditional obligations of the Bank ranking with all other existing and future unsecured and subordinated indebtedness of the Bank. They are subordinated on liquidation, as to principal and interest, and premium, if any, to all claims against the Bank having the same priority as savings account holders or any higher priority. The Debentures are redeemable at the option of the Bank, in whole or in part, at any time after September 15, 1998, at the aggregate principal amount thereof, plus accrued and unpaid interest, if any. The Bank may substitute the Company in its place as obligor on the Debentures. If such Substitution occurs, holders of the Debentures will have the option, at September 15, 1998 or at such later time as the Substitution occurs, to require the Company to purchase all or part of the holder's outstanding Debentures at a price equal to 100% of the principal amount repurchased plus accrued interest through the repurchase date. If the Substitution occurs, upon a change in control of the Company holders of the Debentures will have the option to require the Company to purchase all or part of the holder's outstanding Debenture at a price equal to 101% of the principal amount repurchased plus accrued interest through the repurchase date. Any such repurchase would have a material adverse impact on the Company's liquidity after September 15, 1998. See "Risk Factors Related to the Company--Risks Related to Debentures" and "Use of Proceeds." 86 The following table sets forth certain information regarding the Company's borrowed funds at or for the periods ended on the dates indicated:
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER AT OR FOR THE YEAR 30, ENDED DECEMBER 31, ---------------- ----------------------- 1997 1996 1996 1995 1994 ------- ------- ------- ------ ------ (DOLLARS IN THOUSANDS) FHLB advances: Average balance outstanding....... $ 9,230 $ 3,885 $ 4,259 $3,112 $1,863 Maximum amount outstanding at any month-end during the period...... 19,950 13,900 13,900 7,600 7,000 Balance outstanding at end of period........................... -- -- -- -- 1,250 Weighted average interest rate during the period................ 5.69% 5.92% 5.93% 6.55% 4.87% Debentures: Average balance outstanding....... $ 7,326 -- -- -- -- Maximum amount outstanding at any month-end during the period...... $10,000 -- -- -- -- Balance outstanding at end of period $10,000 -- -- -- -- Weighted average interest rate during the period................ 13.50% -- -- -- -- Lines of credit: Average balance outstanding....... $ 9,757 -- -- -- -- Maximum amount outstanding at any month-end during the period...... 54,623 -- -- -- -- Balance outstanding at end of period........................... 54,623 -- -- -- -- Weighted average interest rate during the period................ 6.24% -- -- -- -- Total borrowings: Average balance outstanding....... $26,313 $ 3,885 $ 4,259 $3,112 $1,863 Maximum amount outstanding at any month-end during period.......... 84,573 13,900 13,900 7,600 7,000 Balance outstanding at end of period........................... 64,623 -- -- -- 1,250 Weighted average interest rate during the period................ 8.07% 5.92% 5.93% 6.55% 4.87%
Asset Securitizations. The Company completed three asset securitizations, one during the fourth quarter of 1996, one during the first quarter of 1997 and one during the third quarter of 1997. Net gains to the Company from these asset securitizations aggregated $21.3 million. As the Company anticipates that it will conduct regular asset securitizations in the future, it is expected that gain on sale of loans securitized will constitute a substantial source of cash flow for the Company's future loan originations, although there can be no assurance in this regard. See "Risk Factors Related to the Company-- Dependence on Asset Securitizations and Impact on Quarterly Operating Results." COMPETITION As a purchaser and originator of mortgage loans, the Company faces intense competition, primarily from mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. Many of these competitors in the financial services business are substantially larger and have more capital and other resources than the Company. Furthermore, certain large national finance companies and conforming mortgage originators have announced their intention to adapt their conforming origination programs and allocate resources to the origination of non- conforming loans. In addition, certain of these larger mortgage companies and commercial banks have begun to offer products similar to those offered by the Company targeting customers similar to those of the Company. Also, the FHLMC recently announced its intention to support such originations by purchasing, guaranteeing and securitizing non-conforming loans originated by qualifying institutions. The entrance of these competitors into the Company's market could have a material adverse effect on the Company's results of operations and financial condition. See "Risk Factors Related to the Company-- Competition." 87 Competition can take many forms, including convenience in obtaining a loan, service, marketing and distribution channels and interest rates. Furthermore, the current level of gains realized by the Company and its competitors on the sale of the type of loans purchased and originated is attracting additional competitors, including at least one quasi-governmental agency, into this market with the effect of lowering the gains that may be realized by the Company on future loan sales. Competition may be affected by fluctuations in interest rates and general economic conditions. During periods of rising rates, competitors which have "locked in" low borrowing costs may have a competitive advantage. During periods of declining rates, competitors may solicit the Company's borrowers to refinance their loans. During economic slowdowns or recessions, the Company's borrowers may have new financial difficulties and may be receptive to offers by the Company's competitors. The Company depends largely on Originators for its purchases and originations of new loans. The Company's competitors also seek to establish relationships with the Company's Originators. The Company's future results may become more exposed to fluctuations in the volume and cost of its wholesale loans resulting from competition from other purchasers of such loans, market conditions and other factors. In addition, the Bank faces increasing competition for deposits and other financial products from non-bank institutions such as brokerage firms and insurance companies in such areas as short-term money market funds, corporate and government securities funds, mutual funds and annuities. In order to compete with these other institutions with respect to deposits and fee services, the Bank relies principally upon local promotional activities, personal relationships established by officers, directors and employees of the Bank and specialized services tailored to meet the individual needs of the Bank's customers. 88 PROPERTIES As of September 30, 1997, the Company conducted its business through six offices.
NET BOOK VALUE OF ORIGINAL PROPERTY OR YEAR LEASEHOLD LEASED LEASED DATE OF IMPROVEMENTS OR OR LEASE AT SEPTEMBER LOCATION OWNED ACQUIRED EXPIRATION 30, 1997 - ---------------------------- ------ -------- ---------- ------------ Corporate Headquarters and Leased 1997 2002 $1,175,000 Regional Lending Center: 10540 Magnolia Ste B Riverside, CA Regional Lending Center: Leased 1997 2000 79,000 Parker Place Aurora, CO Regional Lending Center: (1) Leased 1997 2002 -- 8031 Philips Highway Jacksonville, FL Branch Office: Leased 1986 2001 229,000 1598 E. Highland Avenue San Bernardino, CA Branch Office: Leased 1997 2002 3,000 10540 Magnolia Ste A Riverside, CA National Servicing Center: Owned 1996 -- 534,000 4110 Tigris Way Riverside, CA
- -------- (1) The Company's lease on its previously leased Jacksonville property expired September 30, 1997. Although the Company moved into its new Jacksonville property on October 1, 1997, payments on the lease on the new property did not begin until November 1, 1997. Leasehold improvements on the new property are not expected to be a material expense. The Company has opened two low-cost retail lending offices, and has entered into leases for an additional four retail lending offices which are expected to open by the end of 1997. In addition, the Company intends to open two retail lending offices in the first quarter of 1998. With the exception of one planned office expected to open in Northern California, the Company's two current and five of the six planned retail lending offices will be located in Southern California. In addition, the Company intends to further expand by opening additional retail offices outside of Southern California. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Comparison of Operating Results for the Nine Months Ended September 30, 1997 and September 30, 1996--Non-Interest Expense." SUBSIDIARIES As of September 30, 1997, the Company had two subsidiaries: the Bank and Life Investment Holdings, Inc. Life Investment Holdings, Inc. was incorporated in Delaware in 1997 as a bankruptcy-remote entity for use in the Company's asset securitization activities. The Bank had no subsidiaries at September 30, 1997. 89 LEGAL PROCEEDINGS The Company and the Bank are not involved in any pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company and the Bank. PERSONNEL As of September 30, 1997, the Company had 206 full-time employees and 8 part-time employees. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good. See "The Board of Directors and Management of the Bank--Benefits" for a description of certain compensation and benefit programs offered to the Company's and the Bank's employees. FEDERAL AND STATE TAXATION General. The Company and the Bank will report their income on a calendar year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The statute of limitations has closed for federal tax purposes through the 1992 tax year and for California Franchise Tax Board purposes through the 1991 tax year. Bad Debt Reserve. Historically, savings institutions such as the Bank which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank's deduction with respect to "qualifying real property loans," which are generally loans secured by certain interests in real property, were computed using an amount based on the Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. In August, 1996, the provisions repealing the current thrift bad debt rules were passed by Congress as part of "The Small Business Job Protection Act of 1996." The new rules eliminate the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also require that all thrift institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). The Bank has previously recorded a deferred tax liability equal to the bad debt recapture and as such, the new rules will have no effect on net income or federal income tax expense. For tax years beginning after December 31, 1995, the Bank is permitted to maintain a tax reserve equal to the greater of the base year reserve of the reserve calculated using the experience method available to small (average assets less than $500 million) commercial banks as of the year of the change. Any excess of the reserve as of the year of the change over the allowable reserves must be recaptured into taxable income evenly over a period of six years beginning in the 1996 taxable year subject to the suspension rule described below. As of September 30, 1997, the Bank has an excess amount subject to recapture equal to $330,000. The experience method allows an institution to maintain a bad debt reserve equal to the ratio of the net charge-offs for the last six years divided by total loans for those years multiplied by the total loans outstanding at the end of the current year. However, this method permits the institution to maintain a minimum reserve balance equal to its reserve balance at the end of its base year, adjusted for declines in the loan portfolio for the base year. Although deductions are allowed for the calculated addition to the bad debt reserve, net recoveries are not taken into taxable income. The Bank is currently using the "6-year moving average" method to calculate its bad debt reserve. The Bank anticipates that it will continue this practice. 90 Distributions. To the extent that the Bank makes "non-dividend distributions" to the Company that are considered as made (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method, or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Bank makes a "non-dividend distribution," then approximately one and one-half times the amount so used would be includible in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend Policy" for limits on the payment of dividends of the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve. Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the "Code"), imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers of which the Bank currently has none. AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986 and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT. Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend then 80% of any dividends received may be deducted. STATE AND LOCAL TAXATION State of California. The California franchise tax rate applicable to the Bank equals the franchise tax rate applicable to corporations generally, plus an "in lieu" rate approximately equal to personal property taxes and business license taxes paid by such corporations (but not generally paid by banks or financial corporations such as the Bank); however, the total tax rate cannot exceed 11.3%. Under California regulations, bad debt deductions are available in computing California franchise taxes using a three or six year weighted average loss experience method. The Company, as a savings and loan holding company commercially domiciled in California, will generally be treated as a financial corporation and subject to the general corporate tax rate plus the "in lieu" rate as discussed previously for the Bank. State of Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. 91 REGULATION GENERAL The Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and the FDIC, as the insurer of the Bank's deposit accounts. The Bank is a member of the FHLB System. The Bank's deposit accounts are insured up to applicable limits by the SAIF managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to test the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank or their operations. The Company, as a savings and loan holding company, will also be required to file certain reports with, and otherwise comply with the rules and regulations of, the OTS and the SEC under the federal securities laws. Any change in the regulatory structure or the applicable statutes or regulations, whether by the OTS, the FDIC or the Congress, could have a material impact on the Company, the Bank or their operations. Congress considered in 1997 and is expected to consider again in 1998 the elimination of the federal thrift charter and the abolition of the OTS. The results of such consideration, including possible enactment of legislation, is uncertain. Therefore, the Company and the Bank are unable to determine the extent to which the results of such consideration or possible legislation, if enacted, would affect their business. See "Risk Factors Related to the Company-- Financial Institution Regulation and Possible Legislation." Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings associations set forth in this Prospectus does not purport to be complete descriptions of such statutes and regulations and their effects on the Bank and the Company and is qualified in its entirety by reference to such statutes and regulations. FEDERAL SAVINGS INSTITUTION REGULATION Business Activities. The activities of federal savings institutions are governed by the HOLA and, in certain respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations issued by the OTS and FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal associations, e.g., commercial, non- residential real property loans and consumer loans, are limited to a specified percentage of the institutions's capital or assets. Specifically, commercial loans are limited to 20% of total assets and amounts in excess of 10% of assets may only be used for small business loans. Consumer loans are limited to 35% of assets. Loans-to-One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limit on loans-to-one borrower. Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily- marketable collateral, which is defined to include certain financial instruments and bullion but excludes real estate. At September 30, 1997, the Bank's general limit on loans-to-one borrower was $2.7 million. At September 30, 1997, the Bank's largest aggregate amount of loans-to-one borrower consisted of $778,000. QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid 92 assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities and 50% of the dollar amount of residential mortgages originated by the institution and sold within 90 days) in at least 9 months out of each 12 month period. A savings association that fails the QTL test must either convert to a bank charter or operate under certain restrictions. As of September 30, 1997, the Bank maintained 99.9% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered as "qualified thrift investments." Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in regulatory capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice to, but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of: (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased in capital requirements) at the beginning of the calendar year; or (ii) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In the event the Bank's capital fell below its capital requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. Liquidity. The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage (currently 4%) of its net withdrawable deposit accounts plus short-term borrowings. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity ratio for the nine months ended September 30, 1997 was 11.3%, which exceeded the applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Assessments. Savings institutions are required by regulation to pay assessments to the OTS to fund the agency's operations and supervision of the Bank. The general assessment, paid on a semi-annual basis, is based upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly Thrift Financial Report. The assessments paid by the Bank for the nine months ended September 30, 1997 and the year ended December 31, 1996 totalled $26,000 and $27,000, respectively. Branching. OTS regulations permit federally chartered savings associations to branch nationwide under certain conditions. Generally, federal savings associations may establish interstate networks and geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings associations. For a discussion of the impact of proposed legislation, see "Risk Factors Related to the Company--Financial Institution Regulation and Possible Legislation." Transactions with Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with the Bank, including the Company and any non-savings institution subsidiaries that the Company may establish) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of covered transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described 93 in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally requires that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders who participate in the conduct of the affairs of the institution, and independent contractors (including attorneys, appraisers and accountants) who knowingly or recklessly participate in a wrongful action likely to have a significant adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action itself under certain circumstances. Federal and state law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to implement these safety and soundness standards. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital standard, a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core capital is defined as common stockholder's equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The OTS regulations require that, in meeting the leverage ratio, tangible and risk-based capital standards institutions generally must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. In addition, the OTS prompt corrective action regulation provides that a savings institution that has a leverage capital ratio of less than 4% (3% for institutions receiving the highest CAMEL examination rating) will be deemed to be "undercapitalized" and will be subject to certain restrictions. See "--Prompt Corrective Regulatory Action." The risk-based capital standard for savings institutions requires the maintenance of a ratio of total capital (which is defined as core capital plus supplementary capital) to risk-weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. The components of core capital are equivalent to those discussed earlier under the 3% leverage standard. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate term 94 preferred stock and, within specified limits, the general allowance for loan and lease losses. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The OTS has incorporated an interest rate risk component into its regulatory capital rule. The final interest rate risk rule also adjusts the risk- weighting for certain mortgage derivative securities. Under the rule, savings associations with "above normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200- basis point increase or decrease in market interest rates, divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. A savings association whose measured interest rate risk exposure exceeds 2% must deduct an interest rate component in calculating its total capital under the risk-based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. A savings association with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. The rule also provides that the Director of the OTS may waive or defer an association's interest rate risk component on a case-by-case basis. The OTS has postponed indefinitely the date that the component will first be deducted from an institution's total capital. At September 30, 1997, the Bank met each of its capital requirements. Due to the fluctuations in the Bank's total assets as a result of its mortgage banking operations, the Bank has been required by the OTS since the Bank's examination completed August 9, 1996 to compute its regulatory capital ratios based upon the higher of (1) the average of total assets based on month-end results; or (2) total assets as of the quarter end. Total assets at the end of the quarter ended September 30, 1997 were lower than the month end averages, and therefore the OTS capital averaging requirement was applied. See "Capitalization" for a table which sets forth in terms of dollars and percentages the OTS tangible, leverage and risk-based capital requirements, the Bank's historical capital and percentages at September 30, 1997 and pro forma capitalization of the Company upon the issuance of the Capital Securities. PROMPT CORRECTIVE REGULATORY ACTION Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. Generally, a savings institution that has a total risk- based capital of less than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0% is considered to be undercapitalized (Tier 1 capital is equivalent to core capital). A savings institution that has a total risk-based capital ratio less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by each parent holding company, subject to an aggregate limit on liability. In addition, numerous mandatory supervisory actions may become immediately applicable to the institution depending upon its category, including, but not limited to, increased monitoring by regulators, restrictions on growth, and capital distributions and limitations on expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. 95 INSURANCE OF DEPOSIT ACCOUNTS Deposits of the Bank are presently insured by the SAIF. Both the SAIF and the BIF (the deposit insurance fund that covers most commercial bank deposits) are statutorily required to be recapitalized to a 1.25% of insured reserve deposits ratio. Until recently, members of the SAIF and BIF were paying average deposit insurance premiums of between 24 and 25 basis points. The BIF met the required reserve in 1995, whereas the SAIF was not expected to meet or exceed the required level until 2002 at the earliest. This situation was primarily due to the statutory requirement that SAIF members make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted a new assessment rate schedule of from 0 to 27 basis points under which 92% of BIF members paid an annual premium of only $2,000. With respect to SAIF member institutions, the FDIC adopted a final rule retaining the previously existing assessment rate schedule applicable to SAIF member institutions of 23 to 31 basis points. As long as the premium differential continued, it could have had adverse consequences for SAIF members, including reduced earnings and an impaired ability to raise funds in the capital markets. In addition, SAIF members such as the Bank could have been placed at a substantial competitive disadvantage to BIF members with respect to pricing of loans and deposits and the ability to achieve lower operating costs. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time assessment on SAIF member institutions, including the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment was recognized by the Bank as an expense in the quarter ended September 30, 1996 and is generally tax deductible. The SAIF Special Assessment recorded by the Bank amounted to $448,000 on a pre-tax basis and $256,000 on an after-tax basis. The Funds Act also spreads the obligations for payment of the FICO bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will be assessed for FICO payment at a rate of 1.3 basis points, while SAIF deposits will pay 6.48 basis points. Full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999, provided no savings associations remain as of that time. As a result of the Funds Act, the FDIC voted to lower SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to that of BIF members and subsequently voted to maintain the same rate range for the second half of 1997. However, SAIF members will continue to make the FICO payments described above. The FDIC also lowered the SAIF assessment schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated or whether the BIF and SAIF will eventually be merged. The Bank's assessment rate for the nine months ended September 30, 1997 and the year ended December 31, 1996 was 9 and 26 basis points, respectively, and the premium paid for these periods was $69,000 and $622,000 (including the SAIF Special Assessment), respectively. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. 96 THRIFT RECHARTERING LEGISLATION The Funds Act provides that the BIF and SAIF will merge on January 1, 1999 if there are no more savings associations as of that date. That legislation also requires that the Department of Treasury submit a report to Congress by March 31, 1999 that makes recommendations regarding a common financial institutions charter, including whether the separate charters for thrifts and banks should be abolished. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter and abolish the OTS have been introduced in the Congress. However, the Bank is unable to predict whether such legislation would be enacted and, if so, the extent to which the legislation would restrict the Bank's ability to engage in certain activities or otherwise disrupt its operations. TRUTH IN LENDING The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder requires lenders, such as the Bank, to provide a disclosure statement to borrowers which explains the terms and cost of credit, including, but not limited to, the amount financed, finance charges, other charges and prepayment terms. Regulation Z applies to a wide variety of lending transactions, including mortgage loans and credit cards. The TILA provides borrowers with a three day right to cancel certain credit transactions, including certain residential mortgage loans and other loans where a customer pledges his or her principal dwelling as security for the loan. Failure to comply with the provisions of the TILA could subject a lender to criminal and civil sanctions. The TILA was amended effective October 1, 1995 to impose new disclosure requirements and substantive limitations on closed-end home equity mortgage loans bearing rates or fees above a certain percentage or amount ("TILA Amendments"). Specifically, the TILA Amendments apply to loans secured by a customer's principal dwelling (other than a residential mortgage loan to acquire or construct a borrower's principal dwelling, a reverse mortgage transaction or home equity lines of credit) with (i) an annual percentage rate which exceeds by more than ten percentage points the yield on U.S. Treasury securities having comparable periods of maturity; or (ii) total loan origination fees and other fees payable by the customer which exceed the greater of 8% of the loan amount or $400 ("Covered Loans"). Additional disclosures are required to be provided to the customer under the TILA Amendments for all Covered Loans not less than three business days prior to the consummation of the transaction. OTHER LENDING LAWS The Bank is also required to comply with the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating against applicants on certain prohibited bases, including race, color, religion, national origin, sex, age or marital status. Regulation B promulgated under ECOA restricts creditors from obtaining certain types of information from loan applicants. Among other things, it also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for loans increases as a result of information obtained from a consumer credit agency, another statute, the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply the applicant with the name and address of the reporting agency. In addition, the Bank is subject to the Fair Housing Act and regulations thereunder, which broadly prohibit certain discriminatory practices in connection with the Bank's business. The Bank is also subject to the RESPA and the Home Mortgage Disclosure Act. In addition, the Bank is subject to various other Federal and state laws, rules and regulations governing, among other things, procedures which must be followed by mortgage lenders and servicers, and disclosures which must be made to consumer borrowers. Failure to comply with such laws, as well as with the laws described above, may result in civil and criminal liability. 97 FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement with an investment in FHLB stock at September 30, 1997 of $1.1 million. FHLB advances must be secured by specified types of collateral and all long-term advances may only be obtained for the purpose of providing funds for residential housing finance. At September 30, 1997, the Bank had $6.9 million in outstanding FHLB advances. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended December 31, 1996, 1995 and 1994, dividends from the FHLB to the Bank amounted to $34,000, $30,000 and $20,000, respectively. If dividends were reduced, the Bank's net interest income would likely also be reduced. Further, there can be no assurance that the impact of recent or future legislation on the FHLBs will not also cause a decrease in the value of the FHLB stock held by the Bank. FEDERAL RESERVE SYSTEM The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts. The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $49.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $49.3 million, the reserve requirement is $1.5 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $49.3 million. Effective December 16, 1997, the Federal Reserve Board has reduced the amount of transaction accounts subject to the 3% ratio from $49.3 million to $47.8 million and increased from $4.4 million to $4.7 million the amount of reservable liabilities that is exempted from reserve requirements. The Bank is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but Federal Reserve Board regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. HOLDING COMPANY REGULATION The Company is a non-diversified unitary savings and loan holding company within the meaning of the HOLA. As such, the Company is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Bank must notify the OTS 30 days before declaring any dividend to the Company. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a QTL. See "--Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL requirements. Upon any non-supervisory acquisition by the Company of another savings association, the Company would become a 98 multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. Proposed legislation would treat all savings and loan holding companies as bank holding companies and limit, with narrow "grandfather" rights for existing savings and loan holding companies such as the Company, the activities of such companies to those permissible for bank holding companies. See "Risk Factors Related to the Company--Financial Institution Regulation and Possible Legislation." The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution, or holding company thereof, without prior written approval of the OTS; from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. FEDERAL SECURITIES LAWS The Company's Common Stock is registered with the SEC under the Exchange Act. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Shares held by affiliates of the Company are subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. 99 THE BOARD OF DIRECTORS AND MANAGEMENT OF THE COMPANY The following table sets forth certain information regarding executive officers and directors of the Company.
NAME AGE(1) POSITION(S) HELD WITH COMPANY ---- ----- ----------------------------- Daniel L. Perl 48 Director, President and Chief Executive Officer L. Bruce Mills, Jr. 40 Executive Vice President, Chief Financial Officer and Corporate Secretary Ronald G. Skipper 56 Chairman of the Board Richard C. Caldwell 56 Director John D. Goddard 58 Director Milton E. Johnson 60 Director Robert K. Riley 36 Director
- -------- (1)As of September 30, 1997. BIOGRAPHICAL INFORMATION Daniel L. Perl joined the Bank in 1994 as the Senior Vice President and Chief Loan Officer. Mr. Perl was recently promoted to the position of President and Chief Executive Officer of the Bank. Mr. Perl has over twenty years of continuous experience in real estate finance. Prior to joining the Bank, Mr. Perl served in management positions with various mortgage finance companies and banking institutions. From 1991 to 1993, Mr. Perl was a Senior Vice President with WCP Trading Corporation. L. Bruce Mills, Jr. joined the Bank in 1987 as the Chief Financial Officer. Mr. Mills currently serves as the Executive Vice President and Chief Financial Officer of the Bank. Prior to joining the Bank, Mr. Mills served as an examiner with the Federal Home Loan Bank of San Francisco. Ronald G. Skipper is the Chairman of the Board of the Company and has served as a Director of the Bank since 1983. Mr. Skipper is a self-employed attorney and has been practicing law for 31 years. Richard C. Caldwell is the Chairman of the Board of the Bank. Mr. Caldwell was elected to the Board of Directors of the Bank in 1983 and has served as Chairman of the Board since 1983. Mr. Caldwell has been a partner of Caldwell & Moreland Insurance Brokers since 1995. From 1982 to 1995, Mr. Caldwell has been President and sole owner of Caldwell & Hunt Insurance Brokers. John D. Goddard has served as a Director of the Bank since 1988. Mr. Goddard is a Certified Public Accountant. Mr. Goddard has been President of Goddard Accountancy Corporation since 1962. Milton E. Johnson has served as a Director of the Bank since 1983. Mr. Johnson has been the President of Home Lumber Company, a building materials supplier, since 1960. In addition, Mr. Johnson has been a partner in Central Nevada Hay Company since 1987. Robert K. Riley became a member of the Board following the Reorganization. Mr. Riley is the co-founder and Chief Executive Officer of Millenium Asset Management, L.L.C., an SEC-registered investment advisory firm, and also serves on the Board of Directors of MBIC, an American subsidiary of a large Belgian bank. From 1992 to 1996, Mr. Riley worked for the Millenium Group, a consulting firm focused on designing asset securitization systems and developing risk management programs for European banks. The Board of Directors of the Company is divided into three classes, each of which contains approximately one-third of the Board. The directors shall be elected by the stockholders of the Company for staggered three year terms, or until their successors are elected and qualified. One class of directors, consisting of Messrs. 100 Richard C. Caldwell and Milton E. Johnson, has a term of office expiring at the first annual meeting of stockholders; a second class, consisting of Messrs. Ronald G. Skipper and Daniel L. Perl, has a term of office expiring at the second annual meeting of stockholders; and a third class, consisting of Messrs. John D. Goddard and Robert K. Riley, has a term of office expiring at the third annual meeting of stockholders. The officers of the Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. Since the formation of the Company, none of the executive officers or other personnel has received remuneration from the Company. COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY The Company has established an Audit Committee consisting of Messrs. Skipper, Caldwell and Goddard and a Personnel/Compensation Committee consisting of Messrs. Skipper, Goddard and Johnson. DIRECTORS' COMPENSATION The directors of the Company who are not also employees of the Company receive a monthly retainer for acting in such capacity. The monthly retainer for the Chairman of the Board of the Company is $2,000 while the fee for other non-employee directors of the Company is $1,500. In addition, each non- employee director received fees for each month preceding the Reorganization starting with February 1997 for services performed on behalf of the Company. 101 THE BOARD OF DIRECTORS AND MANAGEMENT OF THE BANK DIRECTORS The following table sets forth certain information regarding the Board of Directors of the Bank.
DIRECTOR TERM NAME AGE(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES ---- ------ ------------------------------ -------- ------- Richard C. Caldwell 56 Chairman of the Board 1983 2000 Director, President and Chief Daniel L. Perl(2) 48 Executive Officer 1996 2000 John D. Goddard 58 Director 1988 1999 Milton E. Johnson 60 Director 1983 1997 Edgar C. Keller 76 Director 1983 1999 Ronald G. Skipper 56 Director 1983 1998
- -------- (1) As of September 30, 1997. (2) Mr. Perl was elected by the Board of Directors to fill the vacancy created by the resignation of a director in June 1996. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS The following table sets forth certain information regarding the executive officers of the Bank who are not also directors.
NAME AGE(1) POSITION(S) HELD WITH THE BANK ---- ----- ------------------------------------------------- L. Bruce Mills, Jr. 40 Executive Vice President, Secretary and Treasurer Joseph R.L. Passerino 42 Senior Vice President Mary E. Darter 37 Executive Vice President
- -------- (1) As of September 30, 1997. BIOGRAPHICAL INFORMATION DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Edgar C. Keller has been a Director of the Bank since 1983. Mr. Keller was a partner with the law firm of Keller & Holt from 1963 until 1994. After such time, Mr. Keller was a partner with the law firm of Keller & Keller until his retirement in 1996. Joseph R. L. Passerino joined the Bank in February 1994. He was named senior vice president in September 1996 and is responsible for all loans originated by the Bank nationally. Prior to that, from 1988 to 1994, Mr. Passerino was in charge of loan production for St. Thomas Capital Corp. Mary E. Darter joined the Bank in March 1994. She was named executive vice president in October 1997. Ms. Darter is primarily responsible for mortgage financing operations. Prior to joining the Bank, Ms. Darter was employed by Imperial Credit Industries/Southern Pacific Thrift and Loan from 1991 to 1994 in charge of the warehouse line of credit division and bulk acquisitions. 102 COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK The Board of Directors meets on a monthly basis and may have additional special meetings upon the request of the Chairman of the Board. During the year ended December 31, 1996, the Board of Directors had 12 regular meetings and 6 special meetings. No director attended fewer than 75% of the total number of Board meetings held during this period. The Board of Directors of the Bank has established the following Board and management committees: The Audit Committee consists of Messrs. Keller and Goddard. The Bank's Internal Auditors report to this committee. The purpose of this committee is to review the audit function and management actions regarding the implementation of audit findings. The committee also maintains a liaison with the outside auditors and reviews the adequacy of internal controls. The committee meets quarterly or as necessary. The Loan Committee consists of Messrs. Skipper, Caldwell, Johnson and Perl. This Committee exercises the authority of the Board pertaining to loan matters and approves or rejects all loans presented by management. This Committee also reviews the workout solutions of problem loans, and approves the classification of assets and the establishment of adequate valuation allowances. The Committee meets monthly. The Executive Committee consists of Messrs. Caldwell, Goddard and Skipper. This committee exercises the authority of the Board of Directors with respect to matters requiring action between meetings of the Board of Directors. Any actions by this committee require subsequent ratification by the Board of Directors at the next regular meeting. The Executive Committee meets as needed. The Investment Committee consists of Messrs. Goddard, Caldwell, Johnson and Mills. The purpose of this committee is to adopt and maintain policies regarding the investment portfolio and to monitor the interest rate and the credit risks of liquidity portfolio investments. This committee meets semi- annually or as needed. The Personnel/Compensation Committee consists of Messrs. Keller, Johnson, Caldwell and Goddard. This Committee is responsible for all matters regarding compensation and benefits, hiring, termination and affirmative action issues. The committee meets semi-annually or as needed. The Asset Classification Committee consists of Messrs. Mills and Perl. The purpose of this committee is to review the Bank's loan portfolio and monitor the classification of assets. This committee meets quarterly. The Bank also maintains a Budget Committee consisting of Messrs. Caldwell, Goddard and Mills. DIRECTORS' COMPENSATION Directors' Fees. Directors of the Bank who are not also employees of the Bank receive a retainer of $950 per month for serving on the Bank's Board of Directors except the Chairman of the Board who receives $1200 per month. 103 EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth, for the year ended December 31, 1996, the cash compensation paid by the Bank, as well as certain other compensation paid or accrued for those years, to the chief executive officer, the former chief executive officer and the other most highly compensated executive officer of the Bank whose salary and bonus exceeded $100,000 in fiscal year 1996 (the "Named Executive Officers").
LONG-TERM COMPENSATION ------------------------------ COMPENSATION AWARDS PAYOUTS ------------------------------------ ---------------------- ------- RESTRICTED SECURITIES OTHER STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION POSITIONS(1) YEAR SALARY($) BONUS($) ($) ($) (#) ($) ($) ------------------ ---- --------- ---------- ------------ ---------- ----------- ------- ------------ Daniel L. Perl President and Chief Executive Officer 1996 $75,000 $1,464,374(2) $ -- $ -- 192,960 $ -- $2,370(3) Nora Vineyard Former President and Chief Executive Officer 1996 76,083 -- -- -- -- -- 88,300(4) Joseph R.L. Passerino Senior Vice President 1996 29,000 217,199 -- -- 12,540 -- 2,300(3)
- -------- (1) Ms. Vineyard retired from the position of President and Chief Executive Officer in July 1996 at which time Mr. Perl was elected to fill these positions. (2) Includes $1,079,185 earned by Mr. Perl during 1996 which was paid in 1997. See "--Previous Employment Agreement." (3) Represents amount contributed by the Bank pursuant to the Bank's 401(k) Plan. (4) Includes $500 contributed by the Bank pursuant to the Bank's 401(k) Plan. Also includes a cash payment of $60,000 plus title to a 1996 automobile with a market value of $27,800 pursuant to an agreement reached between Mrs. Vineyard and the Bank upon her retirement from her position with the Bank. See "--Consultation Agreement." EMPLOYMENT AGREEMENTS Upon the consummation of the Reorganization and the IPO, the Bank and the Company entered into employment agreements (collectively, the "Employment Agreements") with Mr. Perl. The Employment Agreements are intended to ensure that the Bank and the Company will be able to maintain a stable and competent management base after the IPO. The continued success of the Bank and the Company depends to a significant degree on the skills and competence of Mr. Perl. The Employment Agreements provide for three-year terms for Mr. Perl. The Bank Employment Agreement provides that, commencing on the first anniversary date and continuing each anniversary date thereafter, the Board of Directors may extend the agreement for an additional year so that the remaining term shall be three years, unless written notice of non-renewal is given by the Board of Directors after conducting a performance evaluation of Mr. Perl. The term of the Company Employment Agreement shall be extended on a daily basis unless written notice of non-renewal is given by the Board of the Company. The Bank and Company Employment Agreements provide that Mr. Perl's salary will be reviewed annually. The Bank Employment Agreement provides that Mr. Perl will receive a Base Salary of $150,000 per year while the Company Employment Agreement provides that he will receive a Base Salary of $250,000 per year (together, the "Base Salary"), plus a bonus equal to 8.0% of the average of the after tax net income of the Company in excess of 10% return on average equity, as defined in the Employment Agreements ("Bonus"). Such Base Salary is pro rated between the Bank and the Company depending upon the duties performed for and the obligations to each 104 of the Bank and the Company, respectively, while the Bonus shall be paid by the Company. The Bonus for each year shall be payable by the Company no later than March 15 of the following year. In addition to the Base Salary and Bonus, the Employment Agreements provide for, among other things, participation in stock benefits plans and other fringe benefits substantially equivalent to those in which Mr. Perl was participating or otherwise deriving benefit from immediately prior to the beginning of the terms of the Employment Agreements. The Employment Agreements provide for termination by the Bank or the Company for cause as defined in the Employment Agreements at any time. In the event the Bank or the Company chooses to terminate Mr. Perl's employment for reasons other than for cause, or in the event of Mr. Perl's resignation from the Bank or the Company upon: (i) failure to re-elect Mr. Perl to his current offices; (ii) a material change in Mr. Perl's functions, duties or responsibilities; (iii) a relocation of Mr. Perl's principal place of employment by more than 30 miles; (iv) a material reduction in the benefits or perquisites to Mr. Perl from those being provided at the effective date of the Employment Agreement, unless consented to by Mr. Perl or such reduction is part of a nondiscriminatory reduction applicable to all employees; (v) liquidation or dissolution of the Bank or the Company; or (vi) a breach of the Employment Agreement by the Bank or the Company, Mr. Perl or, in the event of death, his beneficiary would be entitled to receive, pursuant to the Bank Employment Agreement, those payments due to Mr. Perl for the remaining term of the Employment Agreement or, pursuant to the Company Employment Agreement, an amount equal to three times his Base Salary under that Employment Agreement for the preceding year plus two times his Bonus for the preceding year; provided, however, that in the event that the Boards of Directors determine that such payment would have a material adverse affect on the Company's financial condition or results of operations, then the Company and the Bank shall pay Mr. Perl two times the previous year's Base Salary under that Employment Agreement, Common Stock of the Company having a fair market value equal to one times the previous year's Base Salary under that Employment Agreement and two times the previous year's Bonus. In the event that Mr. Perl is terminated without cause during 1997, he will be entitled to two times Base Salary and a Bonus equal to $2.2 million. The Bank and the Company would also continue to pay for Mr. Perl's life, health, dental and disability coverage for the remaining term of the Employment Agreement. Under certain circumstances, upon any termination of Mr. Perl, he is subject to a non- compete and liquidated damages provision and a confidentiality provision relating to information in his possession regarding the Company or the Bank. In the event that Mr. Perl thereafter breaches the non-compete provision, the Employment Agreements provide that he shall pay the Bank and the Company, in the aggregate, $500,000, as liquidated damages, in which event the non-compete provision will expire. Under the Employment Agreements, if voluntary or involuntary termination follows a change in control of the Bank or the Company, Mr. Perl or, in the event of his death, his beneficiary, would be entitled to a severance payment equal to the greater of: (i) the payments due for the remaining terms of the agreement; or (ii) three times the average of the five preceding taxable years' annual compensation. The Bank and the Company would also continue Mr. Perl's life, health, and disability coverage for thirty-six months. Payments to Mr. Perl under the Bank's Employment Agreement are guaranteed by the Company in the event that payments or benefits are not paid by the Bank. In the event the Bank is not in compliance with its minimum capital requirements or if any payment under the Bank Employment Agreement would cause the Bank's capital to be reduced below minimum regulatory capital requirements, such payments shall be deferred until such time as the Bank or Successor thereto is in capital compliance. Payment under the Company's Employment Agreement would be made by the Company. All reasonable costs and legal fees paid or incurred by Mr. Perl pursuant to any dispute or question of interpretation relating to the Employment Agreements shall be paid by the Bank or Company, respectively, if Mr. Perl is successful on the merits pursuant to a legal judgment, arbitration or settlement. The Employment Agreements also provide that the Bank and Company shall indemnify Mr. Perl to the fullest extent allowable under federal and Delaware law, respectively. In the event of a change in control of the Bank or the Company during 1997, the total amount of payments due under the Agreements, based on Base Salary to be paid to Mr. Perl and Bonus would be $3.0 million. CONSULTATION AGREEMENT The Bank entered into a five year consulting agreement with Mrs. Nora L. Vineyard commencing on July 15, 1996 (the "Agreement"). Mrs. Vineyard will receive compensation in the amount of $120,000 for a 105 period of three years and $90,000 for the remaining two years of the Agreement. The Agreement provides Mrs. Vineyard with medical insurance during the term of the Agreement. Pursuant to the terms of the Agreement, Mrs. Vineyard will be available to provide advisory and consulting services and will give the Company and the Bank the benefit of her special knowledge, skills, contacts and business experience. A portion of the future payments due pursuant to this Agreement were accrued and expensed during the year ended December 31, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Comparison of Operating Results for the Year Ended December 31, 1996 and December 31, 1995." BENEFITS Insurance Plans. All full-time employees are covered as a group for comprehensive hospitalization, including major medical, long-term disability, accidental death and dismemberment insurance and group term life insurance. Cash Bonus Plan. The Bank adopted a cash bonus plan (the "Bonus Plan") effective February 1996. All employees except for commissioned employees and employees with employment contracts are eligible to participate. The Bonus Plan paid an aggregate of approximately $100,000 in 1996. For 1997, the Bonus Plan will pay bonuses in the aggregate of 15% of the after tax profits of the Bank in excess of a 15% return on average equity, as defined in the Bonus Plan. 401(k) Plan. The Bank maintains the Life Savings Bank Employee's Savings Plan ("401(k) Plan"), a tax-qualified cash or deferred arrangement (i.e., 401(k) feature), under Section 401(a) of the Code. The 401(k) Plan provides participants with benefits upon retirement, death, disability or termination of employment with the Bank. Employees are eligible to participate in the plan following the completion of 6 months of service with the Bank and the attainment of age 21. Participants may authorize the Bank to contribute to the 401(k) Plan, on their behalf, from 1% to 15% of their compensation, not to exceed certain legally permissible limits, including an overall dollar limit of $9,500 for 1997. The 401(k) Plan provides for discretionary matching and profit sharing contributions by the Bank. The Bank currently matches 25% of the first 8% of the deferral by a Participant under the 401(k) Plan each year. Each plan year, the Bank may also make an additional contribution to the 401(k) Plan (a "profit sharing contribution"). The profit sharing contribution, if made by the Bank, is allocated to each Participant's account based on the Participant's compensation for the year relative to the compensation of all participants for the year. Participants are always 100% vested in their deferral contributions. Participants become 20% vested in the Bank's matching contributions and profit sharing contributions after the completion of two year of service with the Bank. Their vested interest in the matching contributions and profit sharing contributions increases by 20% for each year of service completed, so that after the completion of 6 years of service, the Participant is 100% vested in the Bank's matching contributions and profit sharing contributions. A Participant's vested portion of his or her 401(k) Plan account is distributable from the 401(k) Plan upon termination of the participant's employment, death, disability or retirement. Participants may also receive hardship distributions and loans from the 401(k) Plan. Any distribution made to a Participant prior to the Participant's attainment of age 59 1/2 is subject to a 10% tax penalty. The Board of Directors may at any time discontinue the Bank's contributions to employee accounts. For the years ended December 31, 1996, 1995 and 1994, the Bank's matching contributions to the 401(k) Plan were $21,000, zero and $7,000 respectively. The 401(k) Plan permits Participants to direct the investment of their 401(k) plan account into various investment alternatives. The investment accounts are valued daily and participants are provided with information regarding the market value of the participant's investments and all contributions made on his or her behalf on at least an annual basis. The Bank is in the process of amending the 401(k) Plan to permit Participants to invest in an Employer Stock Fund as one of the investment alternatives. The Employer Stock Fund will be invested primarily in shares of Common Stock. 106 Employee Stock Purchase Plan. The Company adopted, as of January 1997, the Life Financial Employee Stock Purchase Plan ("ESPP"), pursuant to which the Company may make available for sale to employees shares of its Common Stock at a price equal to no less than 85% of the fair market value of the Common Stock on the date of purchase. The ESPP is designed to give eligible employees the opportunity to purchase shares of Company Common Stock through payroll deductions of up to a specified amount of their total compensation. The ESPP is expected to become effective in January 1998. STOCK OPTION PLANS The Board of Directors of the Bank adopted the Life Savings Bank, Federal Savings Bank 1996 Stock Option Plan (the "Bank Option Plan"), a stock-based benefit plan which provides for the granting of stock options to eligible officers, employees and directors of the Bank, on November 21, 1996. The Board of Directors of the Bank has reserved 321,600 shares for issuance under the Bank Option Plan. The Bank Option Plan was approved by stockholders of the Bank at an annual meeting held on May 21, 1997. Upon completion of the Reorganization, the Bank Option Plan, by operation of law and pursuant to the Bank Option Plan, became an option plan of the Company. The Board of Directors of the Company has adopted the Life Financial Corp. 1997 Stock Option Plan (the "Company Option Plan") which became effective upon the completion of the IPO (The Bank Option Plan and the Company Option Plan will sometimes hereinafter be referred to as the "Option Plans"). The Board of Directors of the Company has reserved shares equal to 10% of the issued and outstanding shares of the Company giving effect to the Reorganization and the IPO, including Company options that were exchanged for Bank options pursuant to the Bank Option Plan for issuance under the Option Plans. Stock options with respect to shares of the Bank's Common Stock granted under the Bank Option Plan and outstanding prior to completion of the Reorganization automatically became options to purchase three shares of the Company's Common Stock upon identical terms and conditions. The Company has assumed all of the Bank's obligations with respect to the Bank Option Plan. The Option Plans are available to directors, officers and employees of the Company and to directors, officers and employees of its direct or indirect subsidiaries, including the Bank, as selected pursuant to the Option Plans and all references to the Bank's Common Stock under the Bank Option Plan are deemed references to the Company's Common Stock. The stock option benefits provided under the Option Plans are designed to attract and retain qualified directors and personnel in key positions, provide directors, officers and key employees with a proprietary interest in the Company, and as an incentive to contribute to the success of the Bank and the Company and reward key employees for outstanding performance. The Option Plans provides for the grant of: (i) options to purchase the Company's Common Stock intended to qualify as incentive stock options under Section 422 of the Code ("Incentive Stock Options"); (ii) options that do not so qualify ("Non- Statutory Stock Options"); and (iii) Limited Rights. Limited Rights are exercisable only upon a change in control of the Bank or the Company. Upon exercise of "Limited Rights" in the event of a change in control, the employee will be entitled to receive a lump sum cash payment equal to the difference between the exercise price of the related option and the fair market value of the shares of common stock subject to the option on the date of exercise of the right in lieu of purchasing the stock underlying the option. Except for options granted to directors, all options granted contemporaneously with adoption of the Option Plans are intended to be Incentive Stock Options to the extent permitted under Section 422 of the Code. The Option Plans will be in effect for a period of ten years from the dates of adoption by the Boards of Directors of the Bank and the Company, respectively. It is intended that the Option Plans will be revised to include a per person, per year grant limit in order to prevent compensation attributable to options from being included in the $1 million tax-deductible compensation cap of Section 162(m) of the Code. Under the Option Plans, the Personnel/Compensation Committee determines which officers and employees will be granted options and Limited Rights, whether such options are to be incentive or non-statutory stock options, the number of shares subject to each option, the exercise price of each stock option, whether such options may be exercised by delivering other shares of Common Stock and when such options become 107 exercisable. The per share exercise price of a stock option is required to be at least equal to the fair market value of a share of Common Stock on the date the option is granted under the Option Plan. The Bank Committee has granted options to purchase 192,960, and 12,540 shares respectively to Messrs. Perl and Passerino and has granted options to purchase an aggregate of 25,080 shares to two other executive officers as a group at an exercise price of $3.33, as of December 31, 1996. An additional 25,000, 15,000 and 30,000 options have been granted to Messrs. Perl and Passerino and two other executive officers as a group, respectively, under the Company Option Plan at an exercise price of $11.00 effective as of the IPO. An optionee will not be deemed to have received taxable income upon grant or exercise of any Incentive Stock Option, provided that such shares received through the exercise of such option are not disposed of by the employee for at least one year after the date the stock is received in connection with the option exercise and two years after the date of grant of the option. No compensation deduction would be able to be taken by the Company as a result of the grant or exercise of Incentive Stock Options, provided such shares are not disposed of before the expiration of the period described above (a "disqualifying disposition"). In the case of a Non-Statutory Stock Option and in the case of a disqualifying disposition of an Incentive Stock Option, an optionee will be deemed to receive ordinary income upon exercise of the stock option in an amount equal to the amount by which the exercise price is exceeded by the fair market value of the Common Stock purchased by exercising the option on the date of exercise. The amount of any ordinary income deemed to be received by an optionee upon the exercise of a Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive Stock Option would be a deductible expense for tax purposes for the Company. In the case of Limited Rights, upon exercise, the option holder would have to include the amount paid to him or her upon exercise in his gross income for federal income tax purposes in the year in which the payment is made and the Company would be entitled to a deduction for federal income tax purposes of the amount paid. Stock options will become vested and exercisable in the manner specified by the Company. The options granted by the Bank in connection with the adoption of the Bank Option Plan will vest at a rate of 33.3% per year, beginning on November 21, 1999. Options granted by the Company in connection with the Reorganization and the IPO under the Company Option Plan will vest at a rate of 33.3% per year beginning on the third anniversary of the date of the IPO. Incentive Stock Options granted in connection with the Option Plans could be exercisable for three months following the date on which the employee ceases to perform services for the Bank or the Company, except that in the event of death, disability, retirement or termination of an employee's service following change in control of the Bank or the Company, options accelerate and become fully vested and could be exercisable for up to one year thereafter or such longer period as determined by the Company. However, any Incentive Stock Options exercised more than three months following the date the employee ceases to perform services as an employee would be treated as a Non-Statutory Stock Option as described above. In the event of retirement, if the optionee continues to perform services as a director on behalf of the Bank, the Company or an affiliate, unvested options would continue to vest in accordance with their original vesting schedule until the optionee ceases to serve as a director. Non-Statutory Stock Options granted in connection with the Option Plans could be exercisable for one year following the date on which the employee ceases to perform services for the Bank or the Company, except that in the case of death, disability, retirement or termination of the optionee's service following a change in control, options accelerate and become fully vested and could be exercisable for up to one year thereafter or such longer period as determined by the Committee. All Options granted by the Bank to outside directors under the Bank Option Plan were Non-Statutory Stock Options and will vest and become exercisable commencing three years after the date of adoption of the Bank Option Plan at the rate of 33.3% per year, and will expire upon the earlier of ten years following the date of grant or one year following the date the optionee ceases to be a director or consulting director. The Committee has granted options to purchase 9,180 shares to each of the outside directors of the Bank at an exercise price of $3.33, as of December 31, 1996. Options granted by the Company in connection with the Reorganization and the IPO will vest at a rate of 33.3% per year beginning on the third anniversary date of the Reorganization and the IPO. The Compensation Committee of the Company has granted options to purchase 17,500 shares to each of the outside directors under the Company Option Plan at an exercise price of $11.00 effective upon the IPO. In 108 the event of the death or disability of a participant or termination of a participant's service following a change in control of the Company or the Bank, all previously granted options would immediately vest and become fully exercisable. A change in control is defined in the Option Plans generally to occur when a person or group of persons acting in concert acquires beneficial ownership of 20% or more of any class of equity security of the Company or the Bank or in the event of a tender or exchange offer, merger or other form of business combination, sale of all or substantially all of the assets of the Company or the Bank or contested election of directors which resulted in the replacement of a majority of the Board of Directors by persons not nominated by the directors in office prior to the contested election. The following table lists all grants of options and stock appreciation rights ("SARs") under the Option Plan to the Named Executive Officers for fiscal 1996 and contains certain information about the potential value of those options based upon certain assumptions as to the appreciation of the Company's stock over the life of the option. OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE --------------------------------------------------- VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF SECURITIES % OF TOTAL STOCK PRICE UNDERLYING OPTION/SARS APPRECIATION FOR OPTIONS/ GRANTED TO EXERCISE OR OPTIONS(1) SARS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION --------------------- NAME (#)(2)(3)(4)(5) FISCAL YEAR PER SHARE DATE(6) 5% 10% ---- --------------- ------------ ----------- ---------- --------- ----------- Daniel L. Perl.......... 192,960 60.00% $3.33 11/21/06 $404,811 $1,021,605 Joseph R.L. Passerino... 12,540 3.90 3.33 11/21/06 26,308 66,396
- -------- (1) The amounts represent certain assumed rates of appreciation. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the future performance of the Common Stock and overall stock market conditions. There can be no assurance that the amounts reflected in this table will be realized. (2) Options granted pursuant to the Bank Option Plan become exercisable in equal installments at an annual rate of 33.3% beginning November 21, 1999, unless otherwise accelerated. (3) The purchase price may be paid in cash or in Common Stock. (4) Under limited circumstances, such as death or disability of an employee, the employee (or his beneficiary) may request that the Company, in exchange for the employee's surrender of an option, pay to the employee (or beneficiary), the amount by which the fair market value of the Common Stock exceeds the exercise price of the option on the date of the employee's termination of employment. It is within the Company's discretion to accept or reject such a request. (5) To the extent possible, options will be treated as incentive options. (6) The option term is ten years. 109 The following table provides certain information with respect to the number of shares of Common Stock represented by outstanding options held by the Named Executive Officers as of December 31, 1996. Also reported are the values for "in-the-money" options which represent the positive spread between the exercise price of any such existing stock options and the year end price of the Common Stock. No stock appreciation rights were granted to the Named Executive Officers during the year ended December 31, 1996. FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTION/SARS AT FISCAL YEAR END(#) FISCAL YEAR END($) ---------------------------- ---------------------------- NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2) ---- ---------------------------- ---------------------------- Daniel L. Perl.......... 0/192,960 0/0 Joseph R.L. Passerino... 0/12,540 0/0
- -------- (1) The options in this table have an exercise price of $3.33 and become exercisable at an annual rate of 33.3% beginning November 21, 1999. The options will expire ten years from the date of grant. (2) Based on market value of the underlying stock at January 21, 1997, minus the exercise price. The bid and ask prices for the Bank's common stock on January 21, 1997 was $3.00 and $3.67 per share, respectively. Therefore, using the average of the bid and ask prices, there is no positive spread between the exercise price of the options and the price of the common stock of the Bank. TRANSACTIONS WITH CERTAIN RELATED PERSONS The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to a director or executive officer in excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors. The Bank's current policy provides that all loans made by the Bank to its directors and officers are made in the ordinary course of business, are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. During 1996, the law firm of Keller and Keller provided legal representation to the Bank for which it was paid approximately $2,300 for legal fees and related services. Until his retirement in 1996, Mr. Edgar C. Keller, a director of the Bank was a partner with Keller and Keller. In addition, the Bank purchased four policies of insurance from Caldwell & Moreland Insurance Brokers, Inc. for approximately $45,000 which yielded commissions of approximately $5,600. Richard C. Caldwell is a director of the Bank and the Company and a partner of Caldwell & Moreland Insurance Brokers, Inc. 110 SECURITY OWNERSHIP OF MANAGEMENT AND OTHER BENEFICIAL OWNERS The following table sets forth, as of September 30, 1997, certain information as to those persons who were known by management to be beneficial owners of more than 5% of the Company's outstanding shares of Common Stock, each director, each Named Executive Officer and the shares of Common Stock beneficially owned by all directors and executive officers of the Company as a group.
PERCENTAGE NUMBER OF BENEFICIALLY NAME OF BENEFICIAL OWNER POSITION(S) WITH THE COMPANY SHARES(1) OWNED - ------------------------ ---------------------------- --------- ------------ Richard C. Caldwell........... Director 185,798(2) 2.8% John D. Goddard............... Director 171,926(3) 2.6 Ronald G. Skipper............. Chairman of the Board 165,000(4) 2.5 Milton E. Johnson............. Director 114,526(5) 1.7 Daniel L. Perl................ Director, President and Chief Executive Officer 92,422(6) 1.4 Edgar C. Keller............... Director 33,461 0.5 Joseph R.L. Passerino......... Senior Vice President 5,301 0.1 L. Bruce Mills, Jr............ Executive Vice President, Secretary and Treasurer 1,198 -- Wellington Management Company, 872,900 13.3 LLP(7)........................ 75 State Street Boston, MA 02109 Financial Stocks Inc. (8)..... 473,500 7.2 507 Carew Tower Cincinnati, Ohio 45208 All Executive Officers and Di- rectors as a Group (9 persons)....... 769,632(9)(10) 11.8
- -------- (1) The number of shares of Common Stock outstanding and the number owned by the individuals or entities listed does not include any shares issuable pursuant to outstanding options, none of which may be exercised until November 21, 1999. (2) 141,298 shares are held through a qualified employee benefit plan in which Mr. Caldwell is a participant. (3) Of these shares, 78,128 are held by Mr. Goddard and his wife as joint tenants and 93,798 are held in the John D. Goddard Corporation Profit Sharing Plan and Trust. (4) Of these shares 154,836 are held in the Ronald Skipper Pension Sharing Plan and 1,596 are held in custodial accounts for minors. (5) Of these shares, 14,004 are held by Mr. Johnson and his wife as joint tenants, 83,646 are held in an IRA account for Mr. Johnson and his wife, 9,414 are held in custodial accounts for minors, 4,614 are held in joint tenancy with other family members and 924 are owned of record by another family member. (6) Of these shares, 40,006 are held in joint tenancy with Mr. Perl's wife and 52,416 are held in the Navieve Financial Corp. Profit Sharing Trust. (7) As disclosed on a Schedule 13G filed on October 2, 1997. (8) As disclosed on a Schedule 13D Amendment No. 1 filed on September 9, 1997. Financial Stocks, Inc. is general partner of Financial Stocks Limited Partnership and the discretionary investment advisor of Rising Stars Offshore Fund. Of the 473,500 shares, 449,827 shares are owned of record by Financial Stocks Limited Partnership and 23,675 shares are owned by Rising Stars Offshore Fund. (9) Does not include 46,122 shares of Common Stock held by Mrs. Nora L. Vineyard who is currently serving as a consultant to the Bank. (10) Does not include 24,480 shares held by Louis E. Yeager who retired from the Bank's Board of Directors on May 21, 1997. 111 THE TRUST The Trust is a statutory business trust created under Delaware law pursuant to (i) a declaration of trust, dated as of December 2, 1997, executed by the Company, as Sponsor, the Initial Trustee, the Delaware Trustee and the Property Trustee named therein (the "Initial Declaration"), and (ii) the filing of a certificate of trust with the Secretary of State of the State of Delaware on December 2, 1997. The Initial Declaration will be replaced by the Declaration. The Trust exists for the exclusive purposes of (i) issuing and selling the Trust Securities, which represent undivided beneficial interests in the assets of the Trust, (ii) investing the gross proceeds from the sale of the Trust Securities in the Junior Subordinated Debentures and (iii) engaging in only those other activities necessary, advisable or incidental thereto. Accordingly, the Junior Subordinated Debentures will be the sole assets of the Trust and payments under the Junior Subordinated Debentures will be the sole revenues of the Trust. All of the Common Securities will be owned directly by the Company. The Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Capital Securities, except that upon the occurrence and during the continuance of an Event of Default (as defined herein), the rights of the Company as holder of the Common Securities to payments in respect of distributions and payments upon liquidation, redemption or otherwise will be subordinated and rank junior to the rights of the holders of the Capital Securities. See "Description of Capital Securities-- Subordination of Common Securities." The Company will acquire Common Securities in a Liquidation Amount equal to approximately, but not less than, 3% of the total capital of the Trust. The Trust has a term of 31 years, but may dissolve earlier as provided in the Declaration. The Trust's business and affairs will be conducted by the Issuer Trustees and the Administrators, appointed by the Company as the direct holder of the Common Securities. The Issuer Trustees will be State Street, as the Property Trustee, and Delaware Trust as the Delaware Trustee. State Street, as Property Trustee, will act as sole indenture trustee under the Declaration. State Street also will act as trustee under the Guarantee and the Indenture. See "Description of the Guarantee" and "Description of Junior Convertible Subordinated Debentures." The holder of the Common Securities or, if an Event of Default under the Declaration has occurred and is continuing, the holders of a majority in Liquidation Amount of the Capital Securities, will be entitled to appoint, remove or replace the Property Trustee and/or the Delaware Trustee. In no event will the holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators; such voting rights will be vested exclusively in the holder of the Common Securities. The duties and obligations of each Issuer Trustee and the Administrators are governed by the Declaration. The Company will pay directly all fees, expenses, debts and obligations (other than the Trust Securities) related to the Trust and the offering of the Capital Securities, including all ongoing costs, expenses and liabilities of the Trust. The principal executive office of the Trust is LIFE Financial Capital Trust, c/o LIFE Financial Corporation, 10540 North Magnolia Avenue, Unit B, Riverside, California 92505, Attention: Chief Executive Officer. Under the Declaration, all parties to the Declaration will agree, and the holders of the Capital Securities upon purchase of their Capital Securities will be deemed to have agreed, for United States income tax purposes, to treat the Trust as a grantor trust, the Junior Subordinated Debentures as indebtedness of the Company and the Capital Securities as evidence of indirect beneficial ownership in the Junior Subordinated Debentures. DESCRIPTION OF CAPITAL SECURITIES The Capital Securities will represent preferred undivided beneficial interests in the assets of the Trust and the holders thereof will be entitled to a preference over the Common Securities in certain circumstances with respect to Distributions and amounts payable on redemption of the Trust Securities or liquidation of the Trust. See "--Subordination of Common Securities" below. The Declaration will be qualified as an indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Declaration and the Trust Indenture Act. Certain capitalized terms used herein are defined in the Declaration. GENERAL The Capital Securities will be limited to $ aggregate Liquidation Amount at any one time outstanding. The Capital Securities will rank pari passu, and payments will be made thereon pro rata, with the 112 Common Securities except as described under "--Subordination of Common Securities" below. Legal title to the Junior Subordinated Debentures will be held by the Property Trustee in trust for the benefit of the holders of the Capital Securities and the Common Securities. The Guarantee will not guarantee payment of Distributions or amounts payable on redemption of the Capital Securities or liquidation of the Trust when the Trust does not have funds on hand legally available for such payments. See "Description of the Guarantee." DISTRIBUTIONS Distributions on the Capital Securities will be cumulative, will accumulate from the Issue Date and will be payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year, commencing March 15, 1998, at the annual rate of % of the Liquidation Amount to the holders of the Capital Securities on the relevant record dates. The record dates will be the fifteenth day of the month in which the relevant Distribution Date (as defined herein) falls (each, a "Distribution Record Date"). The amount of Distributions payable for any period will be computed on the basis of a 360- day year of twelve 30-day months and, for any period of less than a full calendar month, the number of days elapsed in such month. In the event that any date on which Distributions are payable on the Capital Securities is not a Business Day (as defined herein), payment of the Distributions payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect to any such delay), with the same force and effect as if made on the date such payment was originally payable (each date on which Distributions are payable in accordance with the foregoing, a "Distribution Date"). A "Business Day"" shall mean any day other than a Saturday or a Sunday, or a day on which banking institutions in California are authorized or required by law or executive order to close. So long as no Debenture Event of Default shall have occurred and be continuing, the Company will have the right under the Indenture to elect to defer the payment of interest on the Junior Subordinated Debentures at any time and from time to time for a period not exceeding 20 consecutive quarters with respect to each Extension Period, provided that no Extension Period will end on a day other than an interest payment date for the Junior Subordinated Debentures or extend beyond the Stated Maturity Date. Upon any such election, quarterly Distributions on the Capital Securities will be deferred by the Trust during such Extension Period. Distributions to which holders of the Capital Securities are entitled during any such Extension Period will accumulate additional Distributions thereon at the rate per annum of % thereof, compounded quarterly from the relevant Distribution Date, to the extent permitted by applicable law. The term "Distributions," as used herein, shall include any such additional Distributions. During any such Extension Period, the Company may extend such Extension Period, provided that such extension does not cause such Extension Period to exceed 20 consecutive quarters or to extend beyond the Stated Maturity Date. Upon the termination of any such Extension Period and the payment of all amounts then due, and subject to the foregoing limitations, the Company may elect to begin a new Extension Period. The Company must give the Property Trustee, the Administrators and the Debenture Trustee notice of its election of any Extension Period or any extension thereof at least five Business Days prior to the earlier of (i) the date the Distributions on the Capital Securities would have been payable except for the election to begin or extend such Extension Period and (ii) the date the Administrators are required to give notice to any securities exchange or to holders of the Capital Securities of the Distribution Record Date or the date such Distributions are payable, but in any event not less than five Business Days prior to such record date. There is no limitation on the number of times that the Company may elect to begin an Extension Period. See "Description of Junior Convertible Subordinated Debentures--Option to Extend Interest Payment Date" and "Certain Federal Income Tax Considerations--Interest, Original Issue Discount, Premium and Market Discount." During any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal of or premium, if any, or interest on or repay, repurchase or redeem any debt securities of the Company (including Other Debentures) that rank pari passu with or junior in right of 113 payment to the Junior Subordinated Debentures or (iii) make any guarantee payments with respect to any guarantee by the Company of any securities of any subsidiary of the Company (including guarantees issued with respect to capital securities to Other Trusts ("Other Guarantees")) if such guarantee ranks pari passu with or junior in right of payment to the Junior Subordinated Debentures, other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or preferred stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Guarantee, (d) as a direct result of, and only to the extent required in order to avoid the issuance of fractional shares of capital stock following, a reclassification of the Company's capital stock or the exchange or conversion of one class, or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees. The Company believes that, as a result of its inability to pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, its Common Stock during an Extension Period and the additional restrictions imposed upon it to the extent described under "Description of Junior Convertible Subordinated Debentures--Option to Extend Interest Payment Date," the likelihood of its exercising its right to defer payments of interest is remote and it has no such current intention. However, the Company reserves the right in the future to exercise its option to defer payments of interest on the Junior Subordinated Debentures. See "Risk Factors Related to the Capital Securities--Option to Extend Interest Payment Period; Tax Considerations." The revenue of the Trust available for distribution to holders of the Capital Securities will be limited to payments under the Junior Subordinated Debentures in which the Trust will invest the proceeds from the issuance and sale of the Trust Securities. See "Description of Junior Convertible Subordinated Debentures--General." If the Company does not make interest payments on the Junior Subordinated Debentures, the Property Trustee will not have funds available to pay Distributions on the Capital Securities. The payment of Distributions (if and only to the extent the Trust has funds on hand legally available for the payment of such Distributions) will be guaranteed by the Company on a limited basis as set forth herein under "Description of the Guarantee." CONVERSION RIGHTS General. Capital Securities will be convertible at any time prior to the earlier of (i) 5:00 p.m. (New York time) on the Business Day immediately preceding the date of repayment of such Capital Securities, whether at maturity or upon redemption, and (ii) 5:00 p.m. (New York time) on the Conversion Termination Date (if any), at the option of the holders thereof and in the manner described below, into shares of Common Stock at a conversion rate of shares of Common Stock for each Capital Security (equivalent to a conversion price of $ per share of Common Stock), subject to adjustment as described below under "--Conversion Price Adjustments." The Trust will covenant in the Declaration not to convert Junior Subordinated Debentures held by it except pursuant to a conversion request delivered to the Property Trustee, as initial conversion agent (the "Conversion Agent"), by a holder of Capital Securities. A holder of Capital Securities wishing to exercise its conversion right will be required to deliver an irrevocable conversion request, to the Conversion Agent which will exchange such Capital Security for an equivalent amount of the Junior Subordinated Debentures (based on an exchange ratio of $ principal amount of Junior Subordinated Debentures for each $ Liquidation Amount of Capital Securities) on behalf of such holder and immediately convert such Junior Subordinated Debentures into Common Stock. Holders may obtain copies of the required form of the conversion request from the Conversion Agent. So long as a book-entry system for the Capital Securities is in effect, however, procedures for converting book-entry Capital Securities into shares of Common Stock will differ, as described under "--Form, Denomination, Book- Entry Procedures and Transfer." 114 Holders of Capital Securities at 5:00 p.m. (New York time) on a Distribution Record Date will be entitled to receive the Distribution payable on such Capital Securities on the corresponding Distribution Date notwithstanding the conversion of such Capital Securities following such Distribution Record Date but on or prior to such Distribution Date. Except as provided in the immediately preceding sentence, neither the Trust nor the Company will make, or be required to make, any payment, allowance or adjustment for accumulated and unpaid Distributions, whether or not in arrears, on converted Capital Securities; provided, however, that if notice of redemption of Capital Securities is mailed or otherwise given to holders of Capital Securities or the Trust issues a press release announcing a Conversion Termination Date, then, if any holder of Capital Securities converts any Capital Securities into Common Stock on any date on or after the date on which such notice of redemption is mailed or otherwise given or the date of such press release, as the case may be, and if such date of conversion falls on any day from and including the first day of an Extension Period and on or prior to the Distribution Date upon which such Extension Period ends, such converting holder shall be entitled to receive either (i) if the date of such conversion falls after a Distribution Record Date and on or prior to the next succeeding Distribution Date, all accrued and unpaid Distributions on such Capital Securities (including interest thereon, if any, to the extent permitted by applicable law) to such Distribution Date or (ii) if the date of such conversion does not fall on a date described in clause (i) above, all accrued and unpaid Distributions on such Capital Securities (including interest thereon, if any, to the extent permitted by applicable law) to the most recent Distribution Date prior to the date of such conversion, which Distributions shall, in either such case, be paid to such converting holder unless the date of conversion of such Capital Securities is on or prior to the Distribution Date upon which such Extension Period ends and after the Distribution Record Date for such Distribution Date, in which case such Distributions shall be paid to the person who was the holder of such Capital Securities (or one or more predecessor Capital Securities) at 5:00 p.m. New York time on such Distribution Record Date. The Company will make no payment or allowance for distributions on the shares of Common Stock issued upon such conversion, except to the extent that such shares of Common Stock are held of record on the record date for any such distributions. Each conversion will be deemed to have been effected immediately prior to 5:00 p.m. (Pacific time) on the day on which the related conversion request was received by the Conversion Agent. No fractional shares of Common Stock will be issued as a result of conversion, but in lieu thereof such fractional interest will be paid by the Company in cash based on the Closing Price of the Common Stock on the date such Capital Securities are converted. Conversion Price Adjustments--General. The Conversion Price is subject to adjustment in certain events, including (a) the issuance after the Issue Date of shares of Common Stock as a dividend or a distribution with respect to Common Stock, (b) subdivisions, combinations and reclassification of Common Stock effected after the Issue Date, (c) the issuance to all holders of Common Stock after the Issue Date of rights or warrants entitling them (for a period not exceeding 45 days) to subscribe for or purchase shares of Common Stock at less than the then Current Market Price (as defined below) of the Common Stock, (d) the distribution to all holders of Common Stock after the Issue Date of evidences of indebtedness, capital stock, cash or assets (including securities, but excluding those rights, warrants, dividends and distributions referred to above and dividends and distributions paid exclusively in cash), (e) the payment of dividends (and other distributions) on Common Stock after the Issue Date paid exclusively in cash, excluding cash dividends if the annualized per share amount thereof does not exceed 15% of the Current Market Price of Common Stock as of the trading day immediately preceding the date of declaration of such dividend, and (f) payment to holders of Common Stock after the Issue Date in respect of a tender or exchange offer (other than an odd-lot offer) by the Company for Common Stock at a price in excess of % of the then Current Market Price of Common Stock as of the trading day next succeeding the last date tenders or exchanges may be made pursuant to such tender or exchange offer. "Current Market Price" means, in general, the average of the daily Closing Prices (as defined below) for the five consecutive trading days selected by the Company commencing not more than 20 trading days before, and ending not later than, the earlier of the day in question or, if applicable, the day before the "ex" date (as defined) with respect to the issuance or distribution in question. 115 The Company from time to time may reduce the conversion price of the Junior Subordinated Debentures (and thus the Conversion Price of the Capital Securities) by any amount selected by the Company for any period of at least 20 days, in which case the Company shall give at least 15 days' notice of such reduction. The Company may, at its option, make such reductions in the Conversion Price, in addition to those set forth above, as the Company deems advisable to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. See "Certain Federal Income Tax Considerations--Adjustment of Conversion Price." No adjustment of the Conversion Price will be made upon the issuance of any shares of Common Stock pursuant to any present or future plan providing for the issuance of any shares of Common Stock or options or rights pursuant to any employee benefit plan or program, or pursuant to any option, warrant, right or any exercisable, exchangeable or convertible security outstanding as of the date on which the Junior Subordinated Debentures are first issued. No adjustment of the Conversion Price will be made upon the issuance of rights under any shareholder rights plan. No adjustment in the Conversion Price will be required unless adjustment would require a change of at least one percent (1%) in the price then in effect; provided, however, that any adjustment that would not be required to be made shall be carried forward and taken into account in any subsequent adjustment. If any action would require adjustment of the Conversion Price pursuant to more than one of the provisions described above, only one adjustment shall be made with respect to that action and such adjustment shall be the amount of adjustment that has the highest absolute value to the holder of the Capital Securities. Conversion Price Adjustment--Merger, Consolidation or Sale of Assets of the Company. In the event that the Company shall be a party to any transaction, including, without limitation, and with certain exceptions, (a) a recapitalization or reclassification of the Common Stock, (b) consolidation of the Company with, or merger of the Company into, any other person, or any merger of another person into the Company, (c) any sale, transfer or lease of all or substantially all of the assets of the Company or (d) any compulsory share exchange pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property (each of the foregoing being referred to as a "Transaction"), then the holders of Capital Securities then outstanding will have the right to convert the Capital Securities into the kind and amount of securities, cash or other property receivable upon the consummation of such Transaction by a holder of the number of shares of Common Stock issuable upon conversion of such Capital Securities immediately prior to such Transaction. In the case of a Transaction, each Capital Security would become convertible into the securities, cash or property receivable by a holder of the number of shares of the Common Stock into which such Capital Security was convertible immediately prior to such Transaction. This change could substantially lessen or eliminate the value of the conversion privilege associated with the Capital Securities in the future. For example, if the Company were acquired in a cash merger, each Capital Security would become convertible solely into cash and would no longer be convertible into securities which value would vary depending on the future prospects of the Company and other factors. Conversion Price adjustments or omissions in making such adjustments may, under certain circumstances, be deemed to be distributions that could be taxable as dividends to holders of Capital Securities or to the holders of Common Stock. See "Certain Federal Income Tax Considerations--Adjustment of Conversion Price." Termination of Conversion Rights. In addition to the rights of the Company to redeem the Capital Securities under the circumstances described in this Prospectus, the Company also will have the right to terminate the convertibility of the Capital Securities into Common Stock as described in this paragraph. On and after , and provided the Trust is current in the payment of Distributions on the Capital Securities (except to the extent that the payment of Distributions may have been duly deferred as the result of an Extension Period), the Company may, at its option, terminate the right to convert the Junior Subordinated Debentures into Common Stock, in which case the right to convert the Capital Securities into Common Stock will likewise terminate. The Company may exercise this option only if for at least 20 trading days within any period of 30 116 consecutive trading days ending on or after , , including the last trading day of such period, the Closing Price of the Common Stock exceeds % of the then applicable Conversion Price of the Capital Securities. To exercise this conversion termination option, the Company must cause the Trust to issue a press release for publication on the Dow Jones News Service or on a comparable news service announcing the Conversion Termination Date prior to the opening of business on the second trading day after a period in which the condition in the preceding sentence has been met, but in no event may such press release be issued prior to , . The press release shall announce the Conversion Termination Date and provide the Conversion Price and the Closing Price of the Capital Securities and the Common Stock, in each case as of the close of business on the trading day next preceding the date of the press release. Notice of the termination of conversion rights will be given by first-class mail to the holders of the Capital Securities not more than four Business Days after the Trust issues the press release. The Conversion Termination Date will be a Business Day selected by the Company not less than 30 nor more than 60 days after the date on which the Trust issues the press release announcing its intention to terminate conversion rights of Capital Security holders. In the event that the Company exercises its conversion termination option, conversion rights will expire at 5:00 p.m. (New York time) on the Conversion Termination Date. In the event the Company has not exercised its conversion termination option and the Capital Securities are otherwise called for redemption, the Capital Securities will be convertible at any time prior to 5:00 p.m. (New York time) on the Business Day immediately preceding the date of such redemption. "Closing Price" of any security on any day means the last reported sale price, regular way, on such day or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the NYSE Composite Tape, or, if such security is not listed or admitted to trading on the NYSE, on the principal national securities exchange on which such security is listed or admitted to trading, or if such security is not listed or admitted to trading on a national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. or, if such security is not quoted or admitted to trading on such quotation system, on the principal quotation system on which such security is listed or admitted to trading or quoted, or, if not listed or admitted to trading or quoted on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or, if not so available in such manner, as furnished by any NYSE member firm selected from time to time by the Board of Directors of the Company for that purpose or, if not so available in such manner, as otherwise determined in good faith by the Board of Directors of the Company. REDEMPTION Upon the repayment on the Stated Maturity Date or prepayment prior to the Stated Maturity Date of the Junior Subordinated Debentures, the proceeds from such repayment or prepayment shall be applied by the Property Trustee to redeem a Like Amount (as defined below) of the Trust Securities, upon not less than 30 nor more than 60 days' notice of a date of redemption (the "Redemption Date") at the applicable Redemption Price, which shall be equal to (i) in the case of the repayment of the Junior Subordinated Debentures on the Stated Maturity Date, the Maturity Redemption Price (equal to the principal of and accrued and unpaid interest on the Junior Subordinated Debentures), (ii) in the case of the optional prepayment of the Junior Subordinated Debentures upon the occurrence and continuation of a Special Event, the Special Event Redemption Price (equal to the Special Event Prepayment Price in respect of the Junior Subordinated Debentures) and (iii) in the case of the optional prepayment of the Junior Subordinated Debentures other than as contemplated in clause (ii) above, the Optional Redemption Price (equal to the Optional Prepayment Price in respect of the Junior Subordinated Debentures). See "Description of Junior Convertible Subordinated Debentures--Optional Prepayment" and "--Special Event Prepayment." "Like Amount" means (i) with respect to a redemption of the Trust Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Junior Subordinated Debentures to be paid in accordance 117 with their terms and (ii) with respect to a distribution of Junior Subordinated Debentures upon the liquidation of the Trust, Junior Subordinated Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities of the holder to whom such Junior Subordinated Debentures are distributed. The Company will have the option to prepay the Junior Subordinated Debentures, (i) in whole or in part, on or after the Initial Optional Prepayment Date, at the applicable Optional Prepayment Price and (ii) in whole but not in part, at any time, upon the occurrence of a Special Event, at the Special Event Prepayment Price. LIQUIDATION OF THE TRUST AND DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES The Company will have the right at any time to dissolve the Trust and cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Securities in liquidation of the Trust, subject to satisfaction of liabilities to creditors of the Trust as provided by applicable law. Such right is subject to the receipt by the Company of any required regulatory approval and to the Company having received an opinion of counsel to the effect that such distribution will not be a taxable event to holders of Capital Securities. Under the terms of the Indenture, the Company must use its best efforts to have the Junior Subordinated Debentures listed on Nasdaq or on an exchange at the time that they are distributed to the holders of the Trust Securities. It is not anticipated that an application to have the Junior Subordinated Debentures approved for listing will be made unless a liquidation of the Trust occurs, and there is no assurance that the debentures would be approved for listing upon such application. See "Risk Factors Related to the Capital Securities--Absence of Public Market and Transfer Restrictions." The Trust shall automatically dissolve upon the first to occur of: (i) certain events of bankruptcy, dissolution or liquidation of the Company or the Trust, (ii) the distribution of a Like Amount of the Junior Subordinated Debentures to the holders of the Trust Securities, if the Company, as holder of the Common Securities, has given written direction to the Property Trustee to dissolve the Trust (which direction is optional and, except as described above, wholly within the discretion of the Company, as holder of the Common Securities), (iii) redemption of all of the Trust Securities as described under "--Redemption" above, (iv) expiration of the term of the Trust and (v) the entry of an order for the dissolution of the Trust by a court of competent jurisdiction. If a dissolution occurs as described in clause (i), (ii), (iv), or (v) of the preceding paragraph, the Trust will be liquidated by the Administrators as expeditiously as practicable by distributing, after satisfaction of or provision for liabilities to creditors of the Trust as provided by applicable law, to the holders of the Trust Securities a Like Amount of the Junior Subordinated Debentures, in which event such holders will be entitled to receive out of the assets of the Trust legally available for distribution to holders, after satisfaction of or provision for liabilities to creditors of the Trust as provided by applicable law, an amount equal to the aggregate of the Liquidation Amount plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If the Liquidation Distribution can be paid only in part because the Trust has insufficient assets on hand legally available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Capital Securities and the Common Securities shall be paid on a pro rata basis, except that if a Debenture Event of Default has occurred and is continuing, the Capital Securities shall have a priority over the Common Securities. See "--Subordination of Common Securities" below. After the liquidation date is fixed for any distribution of Junior Subordinated Debentures to holders of the Trust Securities, (i) the Trust Securities will no longer be deemed to be outstanding, (ii) each registered global certificate, if any, representing Trust Securities and held by DTC or its nominee will receive a registered global certificate or certificates representing the Junior Subordinated Debentures to be delivered upon such distribution, and (iii) any certificates representing Trust Securities not held by DTC or its nominee will be deemed to represent Junior Subordinated Debentures having a principal amount equal to the Liquidation Amount of such Trust Securities, and bearing accrued and unpaid interest in an amount equal to the accumulated and unpaid Distributions on such Trust Securities until such certificates are presented to the Administrators or their agent for cancellation, whereupon the Company will issue to such holder, and the Debenture Trustee will authenticate, a certificate representing such Junior Subordinated Debentures. There can be no assurance as to the market prices for the Capital Securities or, if a dissolution and liquidation of the Trust were to occur, for the Junior Subordinated Debentures that may be distributed in 118 exchange for the Trust Securities. Accordingly, the Capital Securities that an investor may purchase, or the Junior Subordinated Debentures that the investor may receive on dissolution and liquidation of the Trust, may trade at a discount to the price that the investor paid to purchase the Capital Securities. REDEMPTION PROCEDURES If applicable, Trust Securities shall be redeemed at the applicable Redemption Price with the proceeds from the contemporaneous repayment or prepayment of the Junior Subordinated Debentures. Any redemption of Trust Securities shall be made and the applicable Redemption Price shall be payable on the Redemption Date only to the extent that the Trust has funds legally available for the payment of such applicable Redemption Price. See also "-- Subordination of Common Securities" below. If the Trust gives a notice of redemption in respect of the Capital Securities, then, by 12:00 noon (New York City time) on the Redemption Date, to the extent funds are legally available, with respect to the Capital Securities held by DTC or its nominees, the Property Trustee will pay or cause the Paying Agent (as defined herein) to pay the Redemption Price to DTC. See "--Form, Denomination, Book-Entry Procedures and Transfer" below. Distributions payable on or prior to the Redemption Date shall be payable to the holders of such Capital Securities on the relevant Distribution Record Dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited with the Property Trustee to pay the Redemption Price for the Capital Securities called for redemption, then all rights of the holders of such Capital Securities will cease, except the right of the holders of such Capital Securities to receive the applicable Redemption Price (without interest on such Redemption Price) or to convert the holder's Capital Securities into Common Stock as described under "--Conversion Rights" above and such Capital Securities will cease to be outstanding. In the event that any Redemption Date is not a Business Day, then the applicable Redemption Price payable on such date will be paid on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay). In the event that payment of the applicable Redemption Price is improperly withheld or refused and not paid either by the Trust or by the Company pursuant to the Guarantee as described under "Description of the Guarantee," (i) Distributions on Capital Securities called for redemption will accumulate on the Redemption Price at the then applicable rate, from the Redemption Date originally established by the Trust to the date such applicable Redemption Price is actually paid, and (ii) the actual payment date will be the Redemption Date for purposes of calculating the applicable Redemption Price. Subject to applicable law (including, without limitation, United States federal securities law and the regulations of the OTS), the Company or its subsidiaries may at any time and from time to time purchase outstanding Capital Securities by tender, in the open market or by private agreement. Notice of any redemption will be mailed at least 30 days but not more than 60 days prior to the Redemption Date to each holder of Trust Securities at its registered address. Unless the Company defaults in payment of the applicable Prepayment Price on, or in the repayment of, the Junior Subordinated Debentures, on and after the Redemption Date Distributions will cease to accrue on the Trust Securities called for redemption. SUBORDINATION OF COMMON SECURITIES Payment of Distributions on, and the Redemption Price of, the Capital Securities and the Common Securities, as applicable, shall be made pro rata based on the Liquidation Amount of the Capital Securities and Common Securities; provided, however, that if on any Distribution Date or Redemption Date a Debenture Event of Default shall have occurred and be continuing, no payment of any Distribution on, or applicable Redemption Price of, any of the Common Securities, and no other payment on account of the redemption, liquidation or other acquisition of the Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions on all of the outstanding Capital Securities for all Distribution periods terminating on or prior thereto or, in the case of Capital Securities called for redemption on a Redemption Date on or prior thereto, the full amount of the Redemption Price therefor, shall have been made or provided for, and all funds available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions on, or Redemption Price of, the Capital Securities then due and payable. 119 In the case of any Event of Default, the Company as holder of the Common Securities will be deemed to have waived any right to act with respect to such Event of Default until the effect of such Event of Default shall have been cured, waived or otherwise eliminated. Until any such Event of Default has been so cured, waived or otherwise eliminated, the Property Trustee shall act solely on behalf of the holders of the Capital Securities and not on behalf of the Company as holder of the Common Securities, and only the holders of the Capital Securities will have the right to direct the Property Trustee to act on their behalf. EVENTS OF DEFAULT; NOTICE The occurrence of a Debenture Event of Default (see "Description of Junior Convertible Subordinated Debentures--Debenture Events of Default") constitutes an "Event of Default" under the Declaration. Within 10 business days after the occurrence of any Event of Default actually known to the Company, the Company shall transmit notice of such Event of Default to the holders of the Capital Securities, the Administrators and the Property Trustee, unless such Event of Default shall have been cured or waived. The Company, as Sponsor, and the Administrators are required to file annually with the Property Trustee a certificate as to whether or not they are in compliance with all the conditions and covenants applicable to them under the Declaration. If a Debenture Event of Default has occurred and is continuing, the Capital Securities shall have a preference over the Common Securities as described under "--Liquidation of the Trust and Distribution of Junior Subordinated Debentures" and "--Subordination of Common Securities" above. REMOVAL OF ISSUER TRUSTEES AND ADMINISTRATORS Unless a Debenture Event of Default shall have occurred and be continuing, any Issuer Trustee or Administrator may be removed at any time by the holder of the Common Securities. If a Debenture Event of Default has occurred and is continuing, the Property Trustee and the Delaware Trustee may be removed at such time by the holders of a majority in Liquidation Amount of the outstanding Capital Securities. In no event will the holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Company as the holder of the Common Securities. No resignation or removal of an Issuer Trustee or Administrator and no appointment of a successor trustee or administrator shall be effective until the acceptance of appointment by the successor trustee or administrator in accordance with the provisions of the Declaration. MERGER OR CONSOLIDATION OF ISSUER TRUSTEES AND ADMINISTRATORS Any entity into which the Property Trustee, the Delaware Trustee or any Administrator that is not a natural person may be merged or converted or with which it may be consolidated, or any entity resulting from any merger, conversion or consolidation to which such Issuer Trustee or Administrator shall be a party, or any entity succeeding to all or substantially all the corporate trust business of such Issuer Trustee or Administrator, shall be the successor of such Issuer Trustee or Administrator under the Declaration, provided such entity shall be otherwise qualified and eligible. MERGERS, CONVERSIONS, CONSOLIDATIONS, AMALGAMATION OR REPLACEMENTS OF THE TRUST The Trust may not merge or convert with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any corporation or other Person, except as described below or as otherwise described in " -- Liquidation of the Trust and Distribution of Junior Subordinated Debentures." The Trust may, at the request of the Company, as holder of the Common Securities, but without the consent of the holders of the Capital Securities, merge or convert with or into, consolidate, amalgamate, or be replaced by or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to a trust organized as such under the laws of any State; provided, that (i) such successor entity either (a) expressly assumes all of the obligations of the Trust with respect to the Capital 120 Securities or (b) substitutes for the Capital Securities other securities having substantially the same terms as the Capital Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Capital Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) the Company expressly appoints a trustee of such successor entity possessing the same powers and duties as the Property Trustee with respect to the Junior Subordinated Debentures, (iii) the Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or other organization on which the Capital Securities are then listed or quoted, if any, (iv) such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, (v) such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Capital Securities (including any Successor Securities) in any material respect (other than any dilution of such holders' interests in the new entity), (vi) such successor entity has a purpose substantially identical to that of the Trust, (vii) prior to such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Company has received an opinion from independent counsel to the Trust experienced in such matters to the effect that (a) such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Capital Securities (including any Successor Securities) in any material respect (other than any dilution of such holders' interests in the new entity), and (b) following such merger, conversion, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and (viii) the Company or any permitted successor or assignee owns all of the common securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee. Notwithstanding the foregoing, the Trust shall not, except with the consent of holders of 100% in Liquidation Amount of the Trust Securities, consolidate, amalgamate, merge or convert with or into, or be replaced by or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any other entity or permit any other entity to consolidate, amalgamate, merge or convert with or into, or replace it if such consolidation, amalgamation, merger, conversion, replacement, conveyance, transfer or lease would cause the Trust or the successor entity not to be classified as a grantor trust for United States federal income tax purposes. VOTING RIGHTS; AMENDMENT OF THE DECLARATION Except as provided below and under "--Mergers, Conversions, Consolidations, Amalgamations or Replacements of the Trust" above and "Description of the Guarantee--Amendments and Assignment" and as otherwise required by law and the Declaration, the holders of the Capital Securities will have no voting rights. The Declaration may be amended from time to time by the Company, the Property Trustee and the Administrators, without the consent of the holders of the Trust Securities (i) to cure any ambiguity, correct or supplement any provisions in the Declaration that may be inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under the Declaration, which shall not be inconsistent with the other provisions of the Declaration, or (ii) to modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Trust Securities are outstanding or to ensure that the Trust will not be required to register as an "investment company" under the Investment Company Act; provided, however, that in the case of clause (i), such action shall not adversely affect in any material respect the interests of the holders of the Trust Securities. Any amendments of the Declaration pursuant to the foregoing shall become effective when notice thereof is given to the holders of the Trust Securities. The Declaration may be amended by the Issuer Trustees, the Administrators and the Company (i) with the consent of holders representing a majority (based upon Liquidation Amount) of the outstanding Trust Securities, and (ii) upon receipt by the Issuer Trustees and the Administrators of an opinion of counsel to the effect that such amendment or the exercise of any power granted to the Issuer Trustees or Administrators in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's 121 exemption from status as an "investment company" under the Investment Company Act, provided that, without the consent of each holder of Trust Securities, the Declaration may not be amended to (i) change the amount or timing of any Distribution or other payment on the Trust Securities or otherwise adversely affect the amount of any Distribution or other payment required to be made in respect of the Trust Securities as of a specified date or (ii) restrict the right of a holder of Trust Securities to institute suit for the enforcement of any such payment on or after such date. So long as any Junior Subordinated Debentures are held by the Property Trustee, the Issuer Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on the Debenture Trustee with respect to the Junior Subordinated Debentures, (ii) waive certain past defaults under the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Junior Subordinated Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Junior Subordinated Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the holders of a majority in Liquidation Amount of all outstanding Capital Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Junior Subordinated Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each holder of the Capital Securities. The Issuer Trustees shall not revoke any action previously authorized or approved by a vote of the holders of the Capital Securities except by subsequent vote of such holders. The Property Trustee shall notify each holder of Capital Securities of any notice of default with respect to the Junior Subordinated Debentures. In addition to obtaining the foregoing approvals of such holders of the Capital Securities, prior to taking any of the foregoing actions, the Issuer Trustees shall obtain an opinion of counsel experienced in such matters to the effect that such action will not affect the Trust's status as a grantor trust for United States federal income tax purposes. Any required approval of holders of Capital Securities may be given at a meeting of such holders convened for such purpose or pursuant to written consent. The Property Trustee will cause a notice of any meeting at which holders of Capital Securities are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be given to each holder of record of Capital Securities in the manner set forth in the Declaration. No vote or consent of the holders of Capital Securities will be required for the Trust to redeem and cancel the Capital Securities in accordance with the Declaration. Notwithstanding that holders of the Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned by the Company or any affiliate of the Company shall, for purposes of such vote or consent, be treated as if they were not outstanding. FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER The Capital Securities to be issued in the Offering may be transferred or exchanged in the manner and at the offices described below. The Capital Securities to be issued in the Offering initially will be represented by one or more Capital Securities in registered, global form (collectively, the "Global Capital Securities"). The Global Capital Securities will be deposited upon issuance with the Property Trustee as custodian for DTC, in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant in DTC, as described below. Except as set forth below, the Global Capital Securities may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Capital Securities may not be exchanged for Certificated Capital Securities except in the limited circumstances described under "--Exchange of Book-Entry Capital Securities for Certificated Capital Securities" below. In addition, transfer of beneficial interests in the Global Capital Securities will be subject to the applicable rules and procedures of DTC and its direct or indirect participants, which may change from time to time. 122 DEPOSITARY PROCEDURES DTC has advised the Trust and the Company that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interest and transfer of ownership interest of each actual purchaser of each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised the Trust and the Company that, pursuant to procedures established by it, (i) upon deposit of the Global Capital Securities, DTC will credit the accounts of Participants on behalf of purchasers of the Capital Securities with portions of the Liquidation Amount of the Global Capital Securities and (ii) ownership of such interests in the Global Capital Securities will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interests in the Global Capital Securities). Investors in the Global Capital Securities may hold their interests therein directly through DTC if they are Participants in such system, or indirectly through organizations which are Participants in such system. All interests in a Global Capital Security may be subject to the procedures and requirements of DTC. The laws of some states require that certain persons take physical delivery in certificated form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Capital Security to such persons will be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of Indirect Participants and certain banks, the ability of a person having beneficial interests in a Global Capital Security to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. For certain other restrictions on the transferability of the Capital Securities, see "--Exchange of Book-Entry Capital Securities for Certificated Capital Securities." Except as described below, owners of interests in the Global Capital Securities will not have Capital Securities registered in their name, will not receive physical delivery of Certificated Capital Securities and will not be considered the registered owners or holders thereof under the Declaration for any purpose. Payments in respect of the Global Capital Security registered in the name of DTC or its nominee will be payable by the Property Trustee to DTC in its capacity as the registered holder under the Declaration. Under the terms of the Declaration, the Property Trustee will treat the persons in whose names the Capital Securities, including the Global Capital Securities, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Property Trustee nor any agent thereof has or will have any responsibility or liability for (i) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interests in the Global Capital Securities, or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Capital Securities or (ii) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised the Trust and the Company that its current practice, upon receipt of any payment in respect of securities such as the Capital Securities, is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in Liquidation Amount of beneficial interests in the relevant security as shown on the records of DTC unless DTC has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of Capital Securities will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be 123 the responsibility of DTC, the Property Trustee, the Trust or the Company. Neither the Trust nor the Company or the Property Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the Capital Securities, and the Trust or the Company and the Property Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Beneficial owners of Capital Securities who desire to convert their Capital Securities into Common Stock should contact their brokers or other Participants or Indirect Participants to obtain information on procedures, including proper forms and cut-off times, for submitting such requests. See "--Conversion Rights." DTC has advised the Trust and the Company that it will take any action permitted to be taken by a holder of Capital Securities only at the direction of one or more Participants to whose account with DTC interests in the Global Capital Securities are credited and only in respect of such portion of the Liquidation Amount of the Capital Securities as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the Declaration, DTC reserves the right to exchange the Global Capital Securities for Certificated Capital Securities and to distribute such Capital Securities to its Participants. The information in this section concerning DTC and book-entry systems has been obtained from sources that the Trust and the Company believe to be reliable, but neither the Trust nor the Company takes responsibility for the accuracy thereof. EXCHANGE OF BOOK-ENTRY CAPITAL SECURITIES FOR CERTIFICATED CAPITAL SECURITIES A Global Capital Security is exchangeable for Certificated Capital Securities if (i) DTC (x) notifies the Company that it is unwilling or unable to continue as depositary for the Global Capital Security and the Company thereupon fails to appoint a successor depositary within 90 days or (y) has ceased to be a clearing agency registered under the Exchange Act and the Company thereupon fails to appoint a successor depositary within 90 days, (ii) the Company in its sole discretion elects to cause the issuance of the Capital Securities in certificated form or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default under the Declaration. In addition, beneficial interests in a Global Capital Security may be exchanged for Certificated Capital Securities upon request but only upon at least 20 days prior written notice given to the Property Trustee by or on behalf of DTC in accordance with customary procedures. In all cases, Certificated Capital Securities delivered in exchange for any Global Capital Security or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of DTC (in accordance with its customary procedures). PAYMENT AND PAYING AGENCY Payments in respect of the Capital Securities held in global form shall be made to DTC, which shall credit the relevant accounts at DTC on the applicable Distribution Dates or, in respect of the Capital Securities that are not held by DTC, such payments shall be made by check mailed to the address of the holder entitled thereto as such address shall appear on the register. The paying agent (the "Paying Agent") shall initially be the Property Trustee and any co-paying agent chosen by the Property Trustee and acceptable to the Company, as holder of the Common Securities. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days written notice to the Property Trustee and the Company. In the event that the Property Trustee shall no longer be the Paying Agent, the Company, as holder of the Common Securities, shall appoint a successor (which shall be a bank or trust company) to act as Paying Agent. REGISTRAR, TRANSFER AGENT AND CONVERSION AGENT The Property Trustee will act as registrar, transfer agent and Conversion Agent for the Capital Securities. Registration of transfers of the Capital Securities will be effected without charge by or on behalf of the Trust but upon payment of any tax or other governmental charges that may be imposed in connection with any 124 transfer or exchange. The Trust will not be required to register or cause to be registered the transfer of any Capital Securities (i) during the period starting 15 days before the mailing of a notice of redemption and ending on the date of such mailing and (ii) after they have been called for redemption. INFORMATION CONCERNING THE PROPERTY TRUSTEE The Property Trustee is under no obligation to exercise any of the powers vested in it by the Declaration at the request of any holder of Trust Securities unless it is offered reasonable indemnity against the costs, expenses and liabilities that might be incurred thereby. If no Event of Default has occurred and is continuing and the Property Trustee is required to decide between alternative causes of action, construe ambiguous provisions in the Declaration or is unsure of the application of any provision of the Declaration, and the matter is not one on which holders of the Capital Securities or the Common Securities are entitled under the Declaration to vote, then the Property Trustee shall take such action as is directed by the Company and, if not so directed, shall take such action as it deems advisable and in the best interests of the holders of the Trust Securities and will have no liability except for its own bad faith, negligence or willful misconduct. MISCELLANEOUS The Administrators are authorized and directed to conduct the affairs of and to operate the Trust in such a way that the Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act, so that the Trust will be classified for United States federal income tax purposes as a grantor trust and so that the Junior Subordinated Debentures will be treated as indebtedness of the Company for United States federal income tax purposes. In this connection, the Company and the Administrators are authorized to take any action, not inconsistent with applicable law, the certificate of trust of the Trust or the Declaration, that the Company and the Administrators determine in their discretion to be necessary or desirable for such purposes, as long as such action does not materially adversely affect the interests of the holders of the Trust Securities. Holders of the Trust Securities have no preemptive or similar rights. The Trust may not borrow money, issue debt, execute mortgages or pledge any of its assets. 125 DESCRIPTION OF JUNIOR CONVERTIBLE SUBORDINATED DEBENTURES The Junior Subordinated Debentures are to be issued under an Indenture (the "Indenture"), between the Company and State Street, as trustee (the "Debenture Trustee"). The Indenture will be qualified under the Trust Indenture Act. This summary of certain terms and provisions of the Junior Subordinated Debentures and the Indenture does not purport to be complete and, where reference is made to particular provisions of the Indenture, such provisions, including the definitions of certain terms, some of which are not otherwise defined herein, are qualified in their entirety by reference to all of the provisions of the Indenture and the Trust Indenture Act. GENERAL Concurrently with the issuance of the Capital Securities, the Trust will invest the proceeds thereof, together with the consideration paid by the Company for the Common Securities, in Junior Subordinated Debentures issued by the Company. The Junior Subordinated Debentures will bear interest at the annual rate of % of the principal amount thereof, payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year (each, an "Interest Payment Date"), commencing March 15, 1998, to the person in whose name each Junior Subordinated Debenture is registered, subject to certain exceptions, at the close of business on the fifteenth day of the month in which the relevant Interest Payment Date falls (each, a "Payment Record Date"). It is anticipated that, until the liquidation, if any, of the Trust, each Junior Subordinated Debenture will be held in the name of the Property Trustee in trust for the benefit of the holders of Trust Securities. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and, for any period of less than a full calendar month, the number of days elapsed in such month. In the event that any date on which interest is payable on the Junior Subordinated Debentures is not a Business Day, then payment of the interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on the date such payment was originally payable. Accrued interest that is not paid on the applicable Interest Payment Date will bear additional interest on the amount thereof (to the extent permitted by law) at the rate per annum of % thereof, compounded quarterly. The term "interest," as used herein, shall include quarterly interest payments, interest on quarterly interest payments not paid on the applicable Interest Payment Date and Additional Sums (as defined herein), as applicable. The Junior Subordinated Debentures will mature on , 2027 (the "Stated Maturity Date"). The Junior Subordinated Debentures will rank pari passu with all Other Debentures and will be unsecured and subordinate and rank junior in right of payment to the extent and in the manner set forth in the Indenture to all Senior Indebtedness of the Company. See "--Subordination" below. Because the Company is a holding company, the right of the Company to participate in any distribution of assets of any subsidiary upon such subsidiary's liquidation or reorganization or otherwise (and thus the ability of holders of the Capital Securities to benefit indirectly from such distribution) is subject to the prior claims of creditors of that subsidiary (including depositors in the case of the Bank), except to the extent that the Company may itself be recognized as a creditor of that subsidiary. At September 30, 1997, the subsidiaries of the Company had total liabilities (excluding liabilities owed to the Company) of approximately $242.6 million, including deposits, in the case of the Bank. Accordingly, the Capital Securities will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries, and holders of Capital Securities should look only to the assets of the Company for payments on the Capital Securities. The Indenture does not limit the incurrence or issuance of other secured or unsecured debt of the Company, including Senior Indebtedness, whether under any other indenture that the Company may enter into in the future or otherwise, and does not limit the incurrence or issuance of secured or unsecured debt by the Company's subsidiaries. See "-- Subordination" below. In addition, as the Company is a holding company, a majority of the operating assets of the Company are owned by the Company's subsidiaries. The Company may rely on dividends from such subsidiaries to meet its obligations for payment of principal and interest on its outstanding debt obligations, if any, and corporate expenses. To the extent that the Company becomes dependent on the Bank for such payments, the Bank will be 126 subject to certain restrictions imposed by federal law on any extensions of credit to, and certain other transactions with, the Company and certain other affiliates, and on investments in stock or other securities thereof. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by various types of collateral. Further, such secured loans, other transactions and investments by the Bank are generally limited in amount as to the Company and as to each of such other affiliates to 10% of the Bank's capital and surplus and as to the Company and all of such other affiliates to an aggregate of 20% of the Bank's capital and surplus. In addition, payment of dividends to the Company by the Bank is subject to ongoing review by banking regulators and is subject to various statutory limitations and in certain circumstances requires prior approval by banking regulatory authorities. Under current OTS regulations, at October 1, 1997 the Bank could have declared dividends to the Company of approximately $ million, of which approximately $ million has been subsequently declared and paid to the Company. Federal regulatory agencies also have the authority to limit further the Bank's payment of dividends based on other factors, such as the maintenance of adequate capital for the Bank, which could reduce the amount of dividends otherwise payable. FORM, REGISTRATION AND TRANSFER If the Junior Subordinated Debentures are distributed to the holders of the Capital Securities issued in the Public Offering, the Junior Subordinated Debentures may be represented by one or more global certificates registered in the name of Cede & Co. as the nominee of DTC. The depositary arrangements for such Junior Subordinated Debentures are expected to be substantially similar to those in effect for the Capital Securities issued in the Offering. For a description of DTC and the terms of the depositary arrangements relating to payments, transfers, voting rights, redemptions and other notices and other matters, see "Description of Capital Securities--Form, Denomination, Book- Entry Procedures and Transfer." PAYMENT AND PAYING AGENTS Payment of principal of and premium, if any, and any interest on Junior Subordinated Debentures will be made at the office of the Debenture Trustee in Boston, Massachusetts or at the office of such Paying Agent or Paying Agents as the Company may designate from time to time, except that at the option of the Company payment of any interest may be made (i) by check mailed to the address of the Person entitled thereto as such address shall appear in the register for Junior Subordinated Debentures or (ii) by transfer to an account maintained by the Person entitled thereto as specified in such register, provided that proper transfer instructions have been received by the relevant Record Date. Payment of any interest on any Junior Subordinated Debenture will be made to the Person in whose name such Junior Subordinated Debenture is registered at the close of business on the Payment Record Date for such interest, except in the case of defaulted interest. The Company may at any time designate additional Paying Agents or rescind the designation of any Paying Agent; however, the Company will at all times be required to maintain a Paying Agent in each place of payment for the Junior Subordinated Debentures. Any monies deposited with the Debenture Trustee or any Paying Agent, or then held by the Company in trust, for the payment of the principal of and premium, if any, or interest on any Junior Subordinated Debenture and remaining unclaimed for two years after such principal and premium, if any, or interest has become due and payable shall, at the request of the Company, be repaid to the Company and the holder of such Junior Subordinated Debenture shall thereafter look, as a general unsecured creditor, only to the Company for payment thereof. OPTION TO EXTEND INTEREST PAYMENT DATE So long as no Debenture Event of Default has occurred and is continuing, the Company will have the right under the Indenture at any time during the term of the Junior Subordinated Debentures to defer the payment of interest at any time or from time to time for a period not exceeding 20 consecutive quarters with respect to each Extension Period, provided that no Extension Period will end on a day other than an Interest Payment Date for the Junior Subordinated Debentures or extend beyond the Stated Maturity Date. At the end of an Extension Period, the Company must pay all interest then accrued and unpaid (together with interest thereon accrued at the 127 annual rate of %, compounded quarterly, to the extent permitted by applicable law). During an Extension Period, interest will continue to accrue and, if the Junior Subordinated Debentures have been distributed to holders of the Trust Securities, holders of Junior Subordinated Debentures (or holders of the Trust Securities while Trust Securities are outstanding) will be required to accrue OID in respect of the stated interest on the Capital Securities for United States federal income tax purposes prior to the receipt of cash attributable to such income. See "Certain Federal Income Tax Considerations-- Interest, Original Issue Discount, Premium and Market Discount." During any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock, (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company (including any Other Debentures) that rank pari passu with or junior in right of payment to the Junior Subordinated Debentures or (iii) make any guarantee payments with respect to any guarantee by the Company of any securities of any subsidiary of the Company (including Other Guarantees) if such guarantee ranks pari passu with or junior in right of payment to the Junior Subordinated Debentures, other than (a) dividends or distributions in shares of or options, warrants or rights to subscribe for or purchase shares of, Common Stock or preferred stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Guarantee, (d) as a direct result of, and only to the extent required in order to avoid the issuance of fractional shares of capital stock following, a reclassification of the Company's capital stock or the exchange or conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees. Prior to the termination of any such Extension Period, the Company may further extend such Extension Period, provided that such extension does not cause such Extension Period to exceed 20 consecutive quarters or to extend beyond the Stated Maturity Date. Upon the termination of any such Extension Period and the payment of all amounts then due on any Interest Payment Date, the Company may elect to begin a new Extension Period, subject to the above requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. The Company must give the Property Trustee, the Administrators and the Debenture Trustee notice of its election of any Extension Period (or an extension thereof) at least five Business Days prior to the earlier of (i) the date the Distributions on the Trust Securities would have been payable except for the election to begin or extend such Extension Period or (ii) the date the Administrators are required to give notice to any securities exchange or to holders of Capital Securities of the Distribution Record Date or the date such Distributions are payable, but in any event not less than five Business Days prior to such record date. The Debenture Trustee shall give notice of the Company's election to begin or extend a new Extension Period to the holders of the Capital Securities. There is no limitation on the number of times that the Company may elect to begin an Extension Period. OPTIONAL PREPAYMENT The Junior Subordinated Debentures will be prepayable, in whole or in part, at the option of the Company at any time on or after , , at a prepayment price (the "Optional Prepayment Price") equal to the percentage of the outstanding principal amount of the Junior Subordinated Debentures specified below, plus, in each case, accrued interest thereon to the date of prepayment: On or after , : 100.000% 128 SPECIAL EVENT PREPAYMENT If a Special Event shall occur and be continuing, the Company may, at any time prior to or after the Initial Optional Prepayment Date, within 90 days after the occurrence of the Special Event, at its option, prepay the Junior Subordinated Debentures in whole, but not in part, at a prepayment price (the "Special Event Prepayment Price") equal to 100% of the principal amount of such Junior Subordinated Debentures plus accrued and unpaid interest thereon to the date of prepayment. A "Special Event" means a Tax Event, a Regulatory Capital Event or an Investment Company Event, as the case may be. A "Tax Event" means (a) the receipt by the Company and the Trust of an opinion of Muldoon, Murphy & Faucette or any other nationally recognized tax counsel experienced in such matters, to the effect that as a result of (i) any amendment to, clarification of, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, (ii) any amendment to, clarification of, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination or the publication of an explanation of legislation by the staff of the Joint Committee on Taxation), (iii) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (iv) any judicial decision, administrative pronouncement, ruling, regulatory procedure, notice, announcement (including any notice or announcement of intent to adopt procedures or regulations) or any other actions taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case, on or after the Issue Date, there is more than an insubstantial risk that (x) the Trust is or within 90 days will be subject to United States federal income tax with respect to income received or accrued on the Junior Subordinated Debentures, (y) interest payable by the Company on the Junior Subordinated Debentures is not or within 90 days will not be deductible by the Company, in whole or in part, for United States federal income tax purposes, or (z) the Trust is or within 90 days will be subject to more than a de minimis amount of other taxes, duties or other governmental charges, or (b) a proposed audit adjustment by a taxing authority which, if sustained, would result in any of the events described in clauses (x), (y) or (z) above (without regard to the 90-day period referred to therein). A "Regulatory Capital Event" means the receipt by the Company and the Trust of an opinion of Muldoon, Murphy & Faucette or any other independent bank regulatory counsel experienced in such matters, to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any rules, guidelines or policies of the OTS, the Board of Governors of the Federal Reserve System (the "Federal Reserve") or any other federal bank regulatory agency or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the Issue Date, (i) the Company is or within 90 days will be subject to capital adequacy requirements and such requirements do not or will not permit the Capital Securities to constitute Tier 1 capital (or its then-equivalent), provided that limitations on inclusion of the Capital Securities in Tier 1 capital that are no more stringent than Federal Reserve capital guidelines in effect as of the date of this Prospectus shall not constitute a Regulatory Capital Event or (ii) the amount of net proceeds received from the sale of the Capital Securities and contributed by the Company to the Bank does not or within 90 days will not constitute Tier 1 (core) capital (or its then- equivalent). An "Investment Company Event" means the receipt by the Company and the Trust of an opinion of Muldoon, Murphy & Faucette or any other nationally recognized counsel experienced in such matters, to the effect that (a) as a result of any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or authority thereof or therein or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after 129 the Issue Date, there is more than an insubstantial risk that the Trust is or within 90 days will be considered an "investment company" that is required to be registered under the Investment Company Act. "Additional Sums" means such additional amounts as may be necessary in order that the amount of Distributions then due and payable by the Trust on the outstanding Capital Securities and Common Securities shall not be reduced as a result of any additional taxes, duties or other governmental charges to which the Trust has become subject as a result of a Tax Event. Notice of any prepayment will be mailed at least 30 days but not more than 60 days before the prepayment date to each holder of Junior Subordinated Debentures to be prepaid at its registered address. Unless the Company defaults in payment of the prepayment price, on and after the prepayment date interest ceases to accrue on such Junior Subordinated Debentures called for prepayment. If the Trust is required to pay any additional taxes, duties or other governmental charges as a result of a Tax Event, the Company will pay as additional amounts on the Junior Subordinated Debentures the Additional Sums. CERTAIN COVENANTS OF THE COMPANY If (1) a Debenture Event of Default occurs (other than solely a default as described in paragraph (iii) under "--Debenture Events of Default" below), (2) there shall have occurred any event of which the Company has actual knowledge that (a) with the giving of notice or the lapse of time, or both, would be, a Debenture Event of Default (other than solely a default as described in paragraph (iii) under "--Debenture Events of Default") and (b) in respect of which the Company shall not have taken reasonable steps to cure, (3) the Company shall be in default with respect to its payment of any obligations under the Guarantee or (4) the Company shall have given notice of its election of an Extension Period, or any extension thereof, as provided in the Indenture and shall not have rescinded such notice, and such Extension Period, or any extension thereof, shall have commenced, then the Company will not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Company (including Other Debentures) that rank pari passu with or junior in right of payment to the Junior Subordinated Debentures or (iii) make any guarantee payments with respect to any guarantee by the Company of any securities of any subsidiary of the Company (including Other Guarantees) if such guarantee ranks pari passu or junior in right of payment to the Junior Subordinated Debentures, other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or preferred stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Guarantee, (d) as a direct result of, and only to the extent required in order to avoid the issuance of fractional shares of capital stock following, a reclassification of the Company's capital stock or the exchange or conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees. The Company will also covenant to (i) maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under the Indenture may succeed to the Company's ownership of the Common Securities, (ii) use its reasonable efforts to cause the Trust (a) to remain a statutory business trust, except in connection with the distribution of Junior Subordinated Debentures to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities of the Trust, or certain mergers, consolidations or amalgamations, each as permitted by the Declaration of the Trust, and (b) to continue not to be classified as an association taxable as a corporation or a partnership for United States federal income 130 tax purposes and (iii) use its reasonable efforts to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Junior Subordinated Debentures. DEBENTURE EVENTS OF DEFAULT The Indenture provides that any one or more of the following described events with respect to the Junior Subordinated Debentures constitutes a "Debenture Event of Default" (whatever the reason for such Debenture Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) failure for 30 days to pay any interest on the Junior Subordinated Debentures or any Other Debentures, when due (subject to the deferral of any due date in the case of an Extension Period); or (ii) failure to pay any principal or premium, if any, on the Junior Subordinated Debentures or any Other Debentures when due whether at maturity, upon redemption, by declaration of acceleration of maturity or otherwise; or (iii) failure to observe or perform in any material respect certain other covenants contained in the Indenture for 90 days after written notice to the Company from the Debenture Trustee or the holders of at least 25% in aggregate outstanding principal amount of Junior Subordinated Debentures; or (iv) certain events in bankruptcy, insolvency or reorganization of the Company. The holders of a majority in aggregate outstanding principal amount of the Junior Subordinated Debentures have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in aggregate outstanding principal amount of the Junior Subordinated Debentures may declare the principal due and payable immediately upon a Debenture Event of Default. The holders of a majority in aggregate outstanding principal amount of the Junior Subordinated Debentures may annul such declaration and waive the default if the default (other than the nonpayment of the principal of the Junior Subordinated Debentures which has become due solely by such acceleration) has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the Debenture Trustee. The holders of a majority in aggregate outstanding principal amount of the Junior Subordinated Debentures affected thereby may, on behalf of the holders of all the Junior Subordinated Debentures, waive any past default except a default in the payment of principal of or premium, if any, or interest on, the Junior Subordinated Debentures (unless such default has been cured and a sum sufficient to pay all matured installments of interest and premium, if any, and principal due otherwise than by acceleration has been deposited with the Debenture Trustee) or a default in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Junior Subordinated Debenture. The Indenture requires the annual filing by the Company with the Debenture Trustee of a certificate as to the absence of certain defaults under the Indenture. The Indenture provides that the Debenture Trustee may withhold notice of a Debenture Event of Default from the holders of the Junior Subordinated Debentures (except a Debenture Event of Default in payment of principal of, or of interest or premium on, the Junior Subordinated Debentures) if the Debenture Trustee considers it in the interest of such holders to do so. CONVERSION OF THE JUNIOR SUBORDINATED DEBENTURES Junior Subordinated Debentures will be convertible at any time prior to the earlier of (i) 5:00 p.m. (Eastern time) on the Business Day immediately preceding the date of repayment of such Junior Subordinated Debentures, whether at maturity or upon prepayment, and (ii) 5:00 p.m. (Eastern time) on the Conversion Termination Date 131 (if any), into Common Stock at the option of the holders of the Junior Subordinated Debentures at the Conversion Price referred to on the cover page of this Prospectus, subject to the Conversion Price adjustments described under "Description of Capital Securities--Conversion Rights." The Trust will covenant not to convert Junior Subordinated Debentures held by it except pursuant to a conversion request delivered to the Conversion Agent by a holder of Capital Securities. Upon surrender of a Capital Security to the Conversion Agent for conversion, the Trust will distribute $ principal amount of the Junior Subordinated Debentures to the Conversion Agent on behalf of the holder of the Capital Security so converted, whereupon the Conversion Agent will convert such Junior Subordinated Debentures into Common Stock on behalf of such holder. The Company's delivery to the holders of the Junior Subordinated Debentures (through the Conversion Agent) of the fixed number of shares of Common Stock into which the Junior Subordinated Debentures are convertible (together with the cash payment, if any, in lieu of fractional shares) will be deemed to satisfy the Company's obligation to pay the principal amount of the Junior Subordinated Debentures so converted, and the accrued and unpaid interest thereon attributable to the period from the last date to which interest has been paid or duly provided for; provided, however, that if any Junior Subordinated Debenture is converted after a Payment Record Date, the interest payable on the related Interest Payment Date with respect to such Junior Subordinated Debenture shall be paid to the Trust (which will distribute such interest to the holder of such Junior Subordinated Debentures on the Payment Record Date) or other holder of such Junior Subordinated Debenture on the Payment Record Date, as the case may be, despite such conversion; provided, further, that if notice of prepayment of Junior Subordinated Debentures is mailed or otherwise given to holders of Junior Subordinated Debentures or the Trust issues a press release announcing a Conversion Termination Date, then, if any holder of Junior Subordinated Debentures converts any Junior Subordinated Debentures into Common Stock on any date on or after the date on which such notice of prepayment is mailed or otherwise given or the date of such press release, as the case may be, and if such date of conversion falls on any day from and including the first day of an Extension Period and on or prior to the Interest Payment Date on which such Extension Period ends, such converting holder shall be entitled to receive either (i) if the date of such conversion falls after a Payment Record Date and on or prior to the next succeeding Interest Payment Date, all accrued and unpaid interest on such Junior Subordinated Debentures to such Interest Payment Date or (ii) if the date of such conversion does not fall on a date described in clause (i) above, all accrued and unpaid interest on such Junior Subordinated Debentures to the most recent Interest Payment Date prior to the date of such conversion, which interest shall, in either such case, be paid to such converting holder, unless the date of conversion of such Junior Subordinated Debentures is on or prior to the Interest Payment Date upon which such Extension Period ends and after the Payment Record Date for such Interest Payment Date, in which case such interest shall be paid to the person who was the holder of such Junior Subordinated Debentures (or one or more predecessor Junior Subordinated Debentures) at 5:00 p.m. (Eastern time) on such Payment Record Date, which amount shall be simultaneously distributed to the holders of the Capital Securities so that any holder of Capital Securities who delivers such Capital Securities for conversion (or who held such converted Capital Securities at 5:00 p.m. (Eastern time) on the Payment Record Date for the Interest Payment Date upon which such Extension Period ends, as the case may be) under the circumstances and during the periods described above will be entitled to receive accumulated and unpaid Distributions in a corresponding amount. See "Description of Capital Securities--Conversion Rights" and "-- Redemption." On and after , , the Company may, at its option, terminate the conversion rights of holders of the Junior Subordinated Debentures if (i) the Company is then current in the payment of interest on the Junior Subordinated Debentures (except to the extent that the payment of interest has been duly deferred as the result of an Extension Period) and (ii) for at least 20 trading days within any period of 30 consecutive trading days ending on or after , , including the last trading day of such period, the Closing Price of the Common Stock shall have exceeded % of the then applicable Conversion Price of the Junior Subordinated Debentures. In order to exercise this conversion termination option, the Company must cause the Trust to issue (or, if the Junior Subordinated Debentures shall have been distributed to holders of the Capital Securities following a Special Event, the Company must issue) a press release for publication on the Dow Jones News Service or on a comparable news service announcing the Conversion Termination Date prior to the opening of business on the second trading day after a period in which the condition in the preceding sentence has been met, but in no event prior to , . The press release shall announce the Conversion 132 Termination Date and provide the Conversion Price and the Closing Price of the Capital Securities and the Common Stock, in each case as of the close of business on the trading day next preceding the date of the press release. The Company is also required to give notice by first-class mail to holders of the Junior Subordinated Debentures in the manner provided for holders of Capital Securities under "Description of Capital Securities--Conversion Rights-- Termination of Conversion Rights." The Conversion Termination Date will be a Business Day selected by the Company which is not less than 30 nor more than 60 calendar days after the date on which such press release is issued. In the event that the Company exercises its conversion termination option, conversion rights will expire at 5:00 p.m. (Eastern time) on the Conversion Termination Date. In the event that the Company has not exercised its conversion termination option and the Junior Subordinated Debentures are otherwise called for prepayment, the Junior Subordinated Debentures will be convertible at any time prior to 5:00 p.m. (Pacific time) on the Business Day immediately preceding the date of such prepayment and in any other case at any time prior to 5:00 p.m. (Eastern time) on the Business Day immediately preceding the Stated Maturity Date of the Junior Subordinated Debentures. ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES If a Debenture Event of Default shall have occurred and be continuing and shall be attributable to the failure of the Company to pay interest or premium, if any, on or principal of the Junior Subordinated Debentures on the due date, a holder of Capital Securities may institute a Direct Action. A holder of Capital Securities may, to the fullest extent permitted by law, also institute an action to enforce the rights of the Property Trustee if the Property Trustee fails to enforce its rights as the holder of the Junior Subordinated Debentures. The Company may not amend the Indenture to remove the foregoing right to bring a Direct Action without the prior written consent of the holders of all of the Capital Securities. Notwithstanding any payments made to a holder of Capital Securities by the Company in connection with a Direct Action, the Company shall remain obligated to pay the principal of or premium, if any, or interest on, the Junior Subordinated Debentures, and the Company shall be subrogated to the rights of the holder of such Capital Securities with respect to payments on the Capital Securities to the extent of any payments made by the Company to such holder in any Direct Action. The holders of the Capital Securities will not be able to exercise directly any remedies, other than those set forth in the preceding paragraph, available to the holders of the Junior Subordinated Debentures. See "Description of Capital Securities--Events of Default; Notice." CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS The Indenture provides that the Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any Person, and no Person shall consolidate with or merge into the Company or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to the Company, unless: (i) in case the Company consolidates with or merges into another Person or conveys or transfers its properties and assets substantially as an entirety to any Person, the successor Person is organized under the laws of the United States or any State or the District of Columbia, and such successor Person expressly assumes the Company's obligations on the Junior Subordinated Debentures, (ii) immediately after giving effect thereto, no Debenture Event of Default, and no event which, after notice or lapse of time or both, would become a Debenture Event of Default, shall have occurred and be continuing, and (iii) certain other conditions as prescribed in the Indenture are met. The general provisions of the Indenture do not afford holders of the Junior Subordinated Debentures protection in the event of a highly leveraged or other transaction involving the Company that may adversely affect holders of the Junior Subordinated Debentures. MODIFICATION OF THE INDENTURE From time to time the Company and the Debenture Trustee may, without the consent of the holders of Junior Subordinated Debentures, amend, waive or supplement the Indenture for specified purposes, including, among 133 other things, curing ambiguities, defects or inconsistencies; provided that, in any such case, such action does not materially adversely affect the interest of the holders of Junior Subordinated Debentures. The Indenture contains provisions permitting the Company and the Debenture Trustee, with the consent of the holders of a majority in principal amount of the Junior Subordinated Debentures, to modify the Indenture in a manner affecting the rights of the holders of Junior Subordinated Debentures; provided that no such modification may, without the consent of the holders of each outstanding Junior Subordinated Debenture so affected, (i) change the Stated Maturity Date, or reduce the principal amount of the Junior Subordinated Debentures or reduce the rate or extend the time of payment of interest thereon or (ii) reduce the percentage of principal amount of Junior Subordinated Debentures the holders of which are required to consent to any such modification of the Indenture. SATISFACTION AND DISCHARGE The Indenture provides that when, among other things, all Junior Subordinated Debentures not previously delivered to the Debenture Trustee for cancellation (i) have become due and payable or (ii) will become due and payable at maturity within one year, and the Company deposits or causes to be deposited with the Debenture Trustee funds, in trust, for the purpose and in an amount sufficient to pay and discharge the entire indebtedness on the Junior Subordinated Debentures not previously delivered to the Debenture Trustee for cancellation, for the principal and premium, if any, and interest to the date of the deposit or to the Stated Maturity Date, as the case may be, then the Indenture will cease to be of further effect (except as to the Company's obligations to pay all other sums due pursuant to the Indenture and to provide the officers' certificates and opinions of counsel described therein), and the Company will be deemed to have satisfied and discharged the Indenture. SUBORDINATION In the Indenture, the Company has agreed that any Junior Subordinated Debentures issued thereunder will be subordinate and junior in right of payment to all Senior Indebtedness to the extent provided in the Indenture. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors, marshaling of assets or any bankruptcy, insolvency, debt restructuring or similar proceedings in connection with any insolvency or bankruptcy proceeding of the Company, the holders of Senior Indebtedness will first be entitled to receive payment in full of all Allocable Amounts (as defined below) in respect of such Senior Indebtedness before the holders of Junior Subordinated Debentures will be entitled to receive or retain any payment in respect thereof. In the event of the acceleration of the maturity of Junior Subordinated Debentures, the holders of all Senior Indebtedness outstanding at the time of such acceleration will first be entitled to receive payment in full of all Allocable Amounts due in respect of such Senior Indebtedness before the holders of Junior Subordinated Debentures will be entitled to receive or retain any payment in respect of the Junior Subordinated Debentures. No payments on account of principal or premium, if any, or interest, if any, in respect of the Junior Subordinated Debentures may be made if there shall have occurred and be continuing a default in any payment with respect to Senior Indebtedness, or an event of default with respect to any Senior Indebtedness resulting in the acceleration of the maturity thereof, or if any judicial proceeding shall be pending with respect to any such default. "Allocable Amounts," when used with respect to any Senior Indebtedness, means all amounts due or to become due on such Senior Indebtedness less, if applicable, any amount which would have been paid to, and retained by, the holders of such Senior Indebtedness (whether as a result of the receipt of payments by the holders of such Senior Indebtedness from the Company or any other obligor thereon or from any holders of, or trustee in respect of, other indebtedness that is subordinate and junior in right of payment to such Senior Indebtedness pursuant to any provision of such indebtedness for the payment over of amounts received on account of such indebtedness to the holders of such Senior Indebtedness or otherwise) but for the fact that such Senior Indebtedness is subordinate or junior in right of payment to (or subject to a requirement that amounts received on such Senior Indebtedness be paid over to obligees on) trade accounts payable or accrued liabilities arising in the ordinary course of business. 134 "Indebtedness" means (i) any obligation of, or any obligation guaranteed by, the Company for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments and any deferred obligation for the payment of the purchase price of property or assets acquired other than in the ordinary course of business and (ii) all indebtedness of the Company for claims in respect of derivative products such as interest and foreign exchange rate contracts, commodity contracts and similar arrangements, whether outstanding on the date of execution of the Indenture or thereafter created, assumed or incurred. For purposes of this definition "claim" has the meaning assigned in Section 101(5) of the Bankruptcy Code of 1978, as amended and in effect on the date of the execution of the Indenture. "Indebtedness Ranking on a Parity with the Junior Subordinated Debentures" means Indebtedness, whether outstanding on the date of execution of the Indenture or thereafter created, assumed or incurred, which specifically by its terms ranks equally with and not prior to the Junior Subordinated Debentures in the right of payment upon the happening of the dissolution or winding-up or liquidation or reorganization of the Company. The securing of any Indebtedness, otherwise constituting Indebtedness Ranking on a Parity with the Junior Subordinated Debentures, shall not be deemed to prevent such Indebtedness from constituting Indebtedness Ranking on a Parity with the Junior Subordinated Debentures. "Indebtedness Ranking Junior to the Junior Subordinated Debentures" means any Indebtedness, whether outstanding on the date of execution of the Indenture or thereafter created, assumed or incurred, which specifically by its terms ranks junior to and not equally with or prior to the Junior Subordinated Debentures (and any other Indebtedness Ranking on a Parity with the Junior Subordinated Debentures) in right of payment upon the happening of the dissolution or winding-up or liquidation or reorganization of the Company. The securing of any Indebtedness, otherwise constituting Indebtedness Ranking Junior to the Junior Subordinated Debentures, shall not be deemed to prevent such Indebtedness from constituting Indebtedness Ranking Junior to the Junior Subordinated Debentures. "Senior Indebtedness" means all Indebtedness, whether outstanding on the date of execution of the Indenture or thereafter created, assumed or incurred, except Indebtedness Ranking on a Parity with the Junior Subordinated Debentures or Indebtedness Ranking Junior to the Junior Subordinated Debentures, and any deferrals, renewals or extensions of such Senior Indebtedness. The Indenture places no limitation on the amount of additional Senior Indebtedness that may be incurred by the Company in the future. The Company expects from time to time to incur additional indebtedness constituting Senior Indebtedness. GOVERNING LAW The Indenture and the Junior Subordinated Debentures will be governed by and construed in accordance with the laws of the State of Delaware. INFORMATION CONCERNING THE DEBENTURE TRUSTEE The Debenture Trustee shall have and be subject to all the duties and responsibilities specified with respect to an indenture trustee under the Trust Indenture Act. Subject to such provisions, the Debenture Trustee is under no obligation to exercise any of the powers vested in it by the Indenture at the request of any holder of Junior Subordinated Debentures, unless offered reasonable indemnity by such holder against the costs, expenses and liabilities which might be incurred thereby. The Debenture Trustee is not required to expend or risk its own funds or otherwise incur personal financial liability in the performance of its duties. 135 DESCRIPTION OF THE GUARANTEE The Guarantee will be executed and delivered by the Company concurrently with the issuance by the Trust of the Capital Securities for the benefit of the holders from time to time of the Capital Securities. State Street will act as indenture trustee ("Guarantee Trustee") under the Guarantee. The Guarantee will be qualified under the Trust Indenture Act. This summary of certain provisions of the Guarantee does not purport to be complete and is subject to, and qualified in its entirety by reference to, all of the provisions of the Guarantee, including the definitions therein of certain terms, and the Trust Indenture Act. The Guarantee Trustee will hold the Guarantee for the benefit of the holders of the Capital Securities. GENERAL The Company will irrevocably agree to pay in full on a subordinated basis, to the extent set forth herein, the Guarantee Payments (as defined below) to the holders of the Capital Securities, as and when due, regardless of any defense, right of set-off or counterclaim that the Trust may have or assert other than the defense of payment. The following payments with respect to the Capital Securities, to the extent not paid by or on behalf of the Trust (the "Guarantee Payments"), will be subject to the Guarantee: (i) any accumulated and unpaid Distributions required to be paid on Capital Securities, to the extent the Trust has funds on hand legally available therefor, (ii) the Redemption Price with respect to any Capital Securities called for redemption, to the extent that the Trust has funds on hand legally available therefor, or (iii) upon a voluntary or involuntary dissolution and liquidation of the Trust (unless the Junior Subordinated Debentures are distributed to holders of the Capital Securities), the lesser of (a) the Liquidation Distribution and (b) the amount of assets of the Trust remaining available for distribution to holders of Capital Securities. The Company's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Company to the holders of the Capital Securities or by causing the Trust to pay such amounts to such holders. The Guarantee will rank subordinate and junior in right of payment to all Senior Indebtedness to the extent provided therein. See "--Status" below. Because the Company is a holding company, the right of the Company to participate in any distribution of assets of any subsidiary, including the Bank, upon such subsidiary's liquidation or reorganization or otherwise (and thus the ability of holders of the Capital Securities to benefit indirectly from such distribution) is subject to the prior claims of creditors of such subsidiary, except to the extent the Company may itself be recognized as a creditor of such subsidiary. Accordingly, the Company's obligations under the Guarantee effectively will be subordinated to all existing and future liabilities of its subsidiaries, including the Bank, and claimants should look only to the assets of the Company for payments thereunder. See "Description of Junior Convertible Subordinated Debentures--General." The Guarantee does not limit the incurrence or issuance of other secured or unsecured debt of the Company, including Senior Indebtedness, whether under the Indenture, any other indenture that the Company may enter into in the future or otherwise, and does not limit the incurrence or issuance of secured or unsecured debt by the Company's subsidiaries. The Company will, through the Guarantee, the Declaration, the Junior Subordinated Debentures and the Indenture, taken together, fully, irrevocably and unconditionally guarantee all of the Trust's obligations under the Capital Securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes such guarantee. It is only the combined operation of these documents that has the effect of providing a full, irrevocable and unconditional guarantee of the Trust's obligations under the Capital Securities. See "Relationship Among the Capital Securities, the Junior Subordinated Debentures and the Guarantee." STATUS The Guarantee will constitute an unsecured obligation of the Company and will rank subordinate and junior in right of payment to all Senior Indebtedness in the same manner as the Junior Subordinated Debentures. The Guarantee will rank pari passu with the Junior Subordinated Debentures and with all other guarantees (if any) issued by the Company after the Issue Date with respect to capital securities (if any) issued by Other 136 Trusts. The Guarantee will constitute a guarantee of payment and not of collection (i.e., the guaranteed party may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against any other person or entity). The Guarantee will be held for the benefit of the holders of the Capital Securities. The Guarantee will not be discharged except by payment of the Guarantee Payments in full to the extent not paid by the Trust or upon distribution to the holders of the Capital Securities of the Junior Subordinated Debentures. The Guarantee does not place a limitation on the amount of additional Senior Indebtedness that may be incurred by the Company in the future. The Company expects from time to time to incur additional indebtedness constituting Senior Indebtedness. EVENTS OF DEFAULT An event of default under the Guarantee will occur upon the failure of the Company to perform any of its payment or other obligations thereunder. The holders of a majority in Liquidation Amount of the Capital Securities will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of the Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under the Guarantee. Any holder of the Capital Securities may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against the Trust, the Guarantee Trustee or any other person or entity. The Company, as guarantor, will be required to file annually with the Guarantee Trustee a certificate as to whether or not the Company is in compliance with all the conditions and covenants applicable to it under the Guarantee. CERTAIN COVENANTS OF THE COMPANY The Guarantee will provide that, so long as any Capital Securities remain outstanding, if there shall have occurred any event that would constitute an event of default under the Guarantee or the Declaration (other than solely a default as described in paragraph (iii) under "Description of Junior Convertible Subordinated Debentures--Debenture Events of Default"), then the Company will not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock, (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company (including any Other Debentures) that rank pari passu with or junior in right of payment to the Junior Subordinated Debentures or (iii) make any guarantee payments with respect to any guarantee by the Company of any securities of any subsidiary of the Company (including Other Guarantees) if such guarantee ranks pari passu with or junior in right of payment to the Junior Subordinated Debentures, other than (a) dividends or distributions in shares of or options, warrants or rights to subscribe for or purchase shares of, Common Stock or preferred stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Guarantee, (d) as a direct result of, and only to the extent required in order to avoid the issuance of fractional shares of capital stock following, a reclassification of the Company's capital stock or the exchange or conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees. AMENDMENTS AND ASSIGNMENT Except with respect to any changes that do not materially adversely affect the rights of holders of the Capital Securities (in which case no vote will be required), the Guarantee may not be amended without the prior approval of the holders of a majority of the Liquidation Amount of such outstanding Capital Securities. The manner of 137 obtaining any such approval will be as set forth under "Description of Capital Securities--Voting Rights; Amendment of the Declaration." All guarantees and agreements contained in the Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Company and shall inure to the benefit of the holders of the Capital Securities then outstanding. TERMINATION The Guarantee will terminate and be of no further force and effect upon full payment of the applicable Redemption Price of the Capital Securities, upon full payment of the Liquidation Amount payable upon liquidation of the Trust or upon distribution of the Junior Subordinated Debentures to the holders of the Capital Securities. The Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of the Capital Securities must restore payment of any sums paid under the Capital Securities or the Guarantee. INFORMATION CONCERNING THE GUARANTEE TRUSTEE The Guarantee Trustee is under no obligation to exercise any of the powers vested in it by the Guarantee at the request of any holder of Capital Securities, unless offered reasonable indemnity against the costs, expenses and liabilities which might be incurred thereby. The Guarantee Trustee is not required to expend or risk its own funds or otherwise incur personal financial liability in the performance of its duties if it reasonably believes that repayment or adequate indemnity is not reasonably assured to it. GOVERNING LAW The Guarantee will be governed by, and construed in accordance with, the laws of the State of Delaware. RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE FULL AND UNCONDITIONAL GUARANTEE Payments of Distributions and other amounts due on the Capital Securities (to the extent the Trust has funds on hand legally available for the payment of such Distributions) will be irrevocably guaranteed by the Company as and to the extent set forth under "Description of the Guarantee." Taken together, the Company's obligations under the Junior Subordinated Debentures, the Indenture, the Declaration and the Guarantee will provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of payments of Distributions and other amounts due on the Capital Securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes such guarantee. It is only the combined operation of these documents that has the effect of providing a full, irrevocable and unconditional guarantee, on a subordinated basis, of the Trust's obligations under the Capital Securities. If and to the extent that the Company does not make the required payments on the Junior Subordinated Debentures, the Trust will not have sufficient funds to make the related payments, including Distributions, on the Capital Securities. The Guarantee will not cover any such payment when the Trust does not have sufficient funds on hand legally available therefor. In such event, the remedy of a holder of Capital Securities is to institute a Direct Action. The obligations of the Company under the Guarantee will be subordinate and junior in right of payment to all Senior Indebtedness. SUFFICIENCY OF PAYMENTS As long as payments of interest and other payments are made when due on the Junior Subordinated Debentures, such payments will be sufficient to cover Distributions and other payments due on the Capital Securities, primarily because: (i) the aggregate principal amount or Prepayment Price of the Junior Subordinated Debentures will be equal to the sum of the Liquidation Amount or Redemption Price, as applicable, of the Capital 138 Securities and Common Securities; (ii) the interest rate and interest and other payment dates on the Junior Subordinated Debentures will match the Distribution rate and Distribution and other payment dates for the Trust Securities; (iii) the Company shall pay for all and any costs, expenses and liabilities of the Trust except the Trust's obligations to holders of Trust Securities under such Trust Securities; and (iv) the Declaration will provide that the Trust is not authorized to engage in any activity that is not consistent with the limited purposes thereof. ENFORCEMENT OF RIGHTS OF HOLDERS OF CAPITAL SECURITIES A holder of any Capital Security may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against the Guarantee Trustee, the Trust or any other person or entity. A default or event of default under any Senior Indebtedness would not constitute a default or Event of Default under the Declaration. However, in the event of payment defaults under, or acceleration of, Senior Indebtedness, the subordination provisions of the Indenture will provide that no payments may be made in respect of the Junior Subordinated Debentures until such Senior Indebtedness has been paid in full or any payment default thereunder has been cured or waived. Failure to make required payments on Junior Subordinated Debentures would constitute an Event of Default under the Declaration. LIMITED PURPOSE OF THE TRUST The Capital Securities will represent preferred beneficial interests in the Trust, and the Trust exists for the sole purpose of issuing and selling the Trust Securities, using the proceeds from the sale of the Trust Securities to acquire the Junior Subordinated Debentures and engaging in only those other activities necessary, advisable or incidental thereto. RIGHTS UPON DISSOLUTION Unless the Junior Subordinated Debentures are distributed to holders of the Trust Securities, upon any voluntary or involuntary dissolution and liquidation of the Trust, after satisfaction of liabilities to creditors of the Trust as required by applicable law, the holders of the Trust Securities will be entitled to receive, out of assets held by the Trust, the Liquidation Distribution in cash. See "Description of Capital Securities--Liquidation of the Trust and Distribution of Junior Subordinated Debentures." Upon any voluntary or involuntary liquidation or bankruptcy of the Company, the Property Trustee, as holder of the Junior Subordinated Debentures, would be a subordinated creditor of the Company, subordinated in right of payment to all Senior Indebtedness as set forth in the Indenture, but entitled to receive payment in full of principal (and premium, if any) and interest, before any stockholders of the Company receive payments or distributions. Since the Company will be the guarantor under the Guarantee and will agree to pay for all costs, expenses and liabilities of the Trust (other than the Trust's obligations to the holders of its Trust Securities), the positions of a holder of Capital Securities and a holder of Junior Subordinated Debentures relative to other creditors and to stockholders of the Company in the event of liquidation or bankruptcy of the Company are expected to be substantially the same. 139 DESCRIPTION OF CAPITAL STOCK OF THE COMPANY GENERAL The Company is authorized to issue 25,000,000 shares of Common Stock having a par value of $.01 per share and 5,000,000 shares of preferred stock having a par value of $.01 per share (the "Preferred Stock"). The Company issued 3,211,716 shares of Common Stock and no shares of Preferred Stock in the Reorganization and 3,335,000 shares of Common Stock in the IPO. Except as discussed below, each share of the Company's Common Stock has the same relative rights as, and is identical in all respects with, each other share of Common Stock. The Common Stock of the Company represents non-withdrawable capital, will not be an account of an insurable type, and will not be insured by the FDIC or any governmental agency. COMMON STOCK Dividends. The Company can pay dividends out of statutory surplus or from certain net profits if, as and when declared by its Board of Directors. The payment of dividends by the Company is subject to limitations which are imposed by law and applicable regulation. See "Dividend Policy" and "Regulation." The holders of Common Stock of the Company will be entitled to receive and share equally in such dividends as may be declared by the Board of Directors of the Company out of funds legally available therefor. If the Company issues Preferred Stock, the holders thereof may have a priority over the holders of the Common Stock with respect to dividends. Voting Rights. The holders of Common Stock of the Company possess exclusive voting rights in the Company. They elect the Company's Board of Directors and act on such other matters as are required to be presented to them under Delaware law or the Company's Certificate of Incorporation or as are otherwise presented to them by the Board of Directors. Except as discussed in "Restrictions on Acquisition of the Company," each holder of Common Stock is entitled to one vote per share and does not have any right to cumulate votes in the election of directors. If the Company issues Preferred Stock, holders of the Preferred Stock may also possess voting rights. Certain matters require an 80% shareholder vote. See "Comparison of Stockholder Rights and Certain Antitakeover Considerations." As a federal savings bank, corporate powers and control of the Bank are vested in its Board of Directors, who elect the officers of the Bank and who fill any vacancies on the Board of Directors. Voting rights are vested exclusively in the owner of the shares of capital stock of the Bank, which is the Company, and voted at the direction of the Company's Board of Directors. Consequently, the holders of the Common Stock do not have direct control of the Bank. Liquidation. In the event of any liquidation, dissolution or winding up of the Bank, the Company, as holder of the Bank's capital stock, would be entitled to receive, after payment or provision for payment of all debts and liabilities of the Bank (including all deposit accounts and accrued interest thereon) all assets of the Bank available for distribution. In the event of liquidation, dissolution or winding up of the Company, the holders of its Common Stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of the Company available for distribution. If Preferred Stock is issued, the holders thereof may have a priority over the holders of the Common Stock in the event of liquidation or dissolution. Preemptive Rights. Holders of the Common Stock of the Company are not entitled to preemptive rights with respect to any shares which may be issued. The Common Stock is not subject to redemption. PREFERRED STOCK None of the shares of the Company's authorized Preferred Stock have been issued. Such stock may be issued with such preferences and designations as the Board of Directors may from time to time determine. The 140 Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the Common Stock and may assist management in impeding an unfriendly takeover or attempted change in control. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions in the Company's Certificate of Incorporation and Bylaws and in its management remuneration programs, together with provisions of Delaware corporate law, may have anti-takeover effects. Regulatory restrictions also may make it difficult for persons or companies to acquire control of the Company. However, the Company may be subject to Section 2115 of the California General Corporation Law. This may have the effect of superseding certain provisions of the Company's Certificate of Incorporation and Bylaws that could have anti-takeover effects, particularly those provisions providing for a staggered board of directors, eliminating cumulative voting, electing and removing directors, calling of special meetings and approval of certain corporate transactions. In addition, California law is more restrictive than Delaware law as to the payment of dividends. However, if its securities remain listed on the National Market System of the Nasdaq Stock Market and there are at least 800 stockholders, or if more than 50% of the Company's stockholders have addresses outside California, the Company will be exempt from the provisions of Section 2115. RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS A number of provisions of the Company's Certificate of Incorporation and Bylaws deal with matters of corporate governance and certain rights of stockholders. The following discussion is a general summary of the provisions of the Company's Certificate of Incorporation and Bylaws which might be deemed to have a potential "anti-takeover" effect. These provisions may have the effect of discouraging a future takeover attempt which is not approved by the Board of Directors but which individual Company stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of the current Board of Directors or management of the Company more difficult. The following description of certain of the provisions of the Certificate of Incorporation and Bylaws of the Company is necessarily general and reference should be made in each case to such Certificate of Incorporation and Bylaws, which are incorporated herein by reference. See "Additional Information" as to how to obtain a copy of these documents. Limitation on Voting Rights. The Certificate of Incorporation of the Company provides that in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of Common Stock (the "Limit") be entitled or permitted to any vote in respect of the shares held in excess of the Limit. Beneficial ownership is determined pursuant to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the Exchange Act, and includes shares beneficially owned by such person or any of his affiliates (as defined in the Certificate of Incorporation), shares which such person or his affiliates have the right to acquire upon the exercise of conversion rights or options and shares as to which such person and his affiliates have or share investment or voting power, but shall not include shares beneficially owned by employee benefit plans or directors, officers and employees of the Bank or Company or shares that are subject to a revocable proxy and that are not otherwise beneficially owned, or deemed by the Company to be beneficially owned, by such person and his affiliates. The Certificate of Incorporation also contains provisions authorizing the Board of Directors to construe and apply the Limit and to demand that any person reasonably believed to beneficially own Common Stock in excess of the Limit (or hold of record Common Stock beneficially owned in excess of the Limit) to provide the Company with certain information. No assurance can be given that a court applying Delaware law would enforce such provisions of the Certificate of Incorporation. The Certificate of Incorporation of the Company further provides that this provision limiting voting rights may only be amended upon the vote of 80% of the outstanding shares of voting stock (after giving effect to the limitation on voting rights). 141 Board of Directors. The Board of Directors of the Company is divided into three classes, each of which shall contain approximately one-third of the whole number of members of the Board. Each class shall serve a staggered term, with approximately one-third of the total number of directors being elected each year. The Company's Certificate of Incorporation and Bylaws provide that the size of the Board shall be determined by a majority of the directors. The Certificate of Incorporation and the Bylaws provide that any vacancy occurring in the Board, including a vacancy created by an increase in the number of directors or resulting from death, resignation, retirement, disqualification, removal from office or other cause, may be filled for the remainder of the unexpired term exclusively by a majority vote of the directors then in office. The classified Board is intended to provide for continuity of the Board of Directors and to make it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of the Board of Directors without the consent of the incumbent Board of Directors of the Company. The Certificate of Incorporation of the Company provides that a director may be removed from the Board of Directors prior to the expiration of his term only for cause, upon the vote of 80% of the outstanding shares of voting stock. In the absence of these provisions, the vote of the holders of a majority of the shares could remove the entire Board, with or without cause, and replace it with persons of such holders' choice. Cumulative Voting, Special Meetings and Action by Written Consent. The Certificate of Incorporation does not provide for cumulative voting for any purpose. Moreover, special meetings of stockholders of the Company may be called only by the Board of Directors of the Company. The Certificate of Incorporation also provides that any action required or permitted to be taken by the stockholders of the Company may be taken only at an annual or special meeting and prohibits stockholder action by written consent in lieu of a meeting. Authorized Shares. The Certificate of Incorporation authorizes the issuance of 25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The shares of Common Stock and Preferred Stock were authorized in an amount greater than that issued in the Reorganization and the IPO to provide the Company's Board of Directors with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock options. However, these additional authorized shares may also be used by the Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of the Company. The Board of Directors also has sole authority to determine the terms of any one or more series of Preferred Stock, including voting rights, conversion rates, and liquidation preferences. As a result of the ability to fix voting rights for a series of Preferred Stock, the Board has the power, to the extent consistent with its fiduciary duty, to issue a series of Preferred Stock to persons friendly to management in order to attempt to block a post-tender offer merger or other transaction by which a third party seeks control, and thereby assist management to retain its position. The Company's Board of Directors currently has no plans for the issuance of additional shares, other than the issuance of additional shares as established in connection with the exercise of conversion rights by holders of Capital Securities, see "Description of Capital Securities--Conversion Rights," and upon exercise of stock options to be issued pursuant to the terms of the Option Plans. Stockholder Vote Required to Approve Business Combinations with Principal Stockholders. The Certificate of Incorporation requires the approval of the holders of 80% of the Company's outstanding shares of voting stock to approve certain "Business Combinations," as defined therein, and related transactions. Under Delaware law, absent this provision, Business Combinations, including mergers, consolidations and sales of all or substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of only a majority of the outstanding shares of Common Stock of the Company and any other affected class of stock. Under the Certificate of Incorporation, 80% approval of stockholders is required in connection with any transaction involving an Interested Stockholder (as defined below) except (i) in cases where the proposed transaction has been approved in advance by a majority of those members of the Company's Board of Directors who are unaffiliated with the Interested Stockholder and were directors prior to the time when the Interested Stockholder became an Interested Stockholder or (ii) if the proposed transaction meets certain conditions set forth therein which are designed to afford the stockholders a fair price in consideration for their shares in which case, if a stockholder vote is required, approval of only a majority of the outstanding shares of voting stock would be sufficient. The term "Interested Stockholder" is defined to include any individual, corporation, partnership or 142 other entity (other than the Company or its subsidiary) which owns beneficially or controls, directly or indirectly, 10% or more of the outstanding shares of voting stock of the Company. This provision of the Certificate of Incorporation applies to any "Business Combination," which is defined to include: (i) any merger or consolidation of the Company or any of its subsidiaries with or into any Interested Stockholder or Affiliate (as defined in the Certificate of Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange, mortgage, transfer, or other disposition to or with any Interested Stockholder or Affiliate of 25% or more of the assets of the Company or combined assets of the Company and its subsidiary; (iii) the issuance or transfer to any Interested Stockholder or its Affiliate by the Company (or any subsidiary) of any securities of the Company in exchange for any assets, cash or securities the value of which equals or exceeds 25% of the fair market value of the Common Stock of the Company; (iv) the adoption of any plan for the liquidation or dissolution of the Company proposed by or on behalf of any Interested Stockholder or Affiliate thereof; and (v) any reclassification of securities, recapitalization, merger or consolidation of the Company which has the effect of increasing the proportionate share of Common Stock or any class of equity or convertible securities of the Company owned directly or indirectly by an Interested Stockholder or Affiliate thereof. Evaluation of Offers. The Certificate of Incorporation of the Company further provides that the Board of Directors of the Company, when evaluating any offer of another "Person" (as defined therein) to: (i) make a tender or exchange offer for any equity security of the Company; (ii) merge or consolidate the Company with another corporation or entity; or (iii) purchase or otherwise acquire all or substantially all of the properties and assets of the Company, may, in connection with the exercise of its judgment in determining what is in the best interest of the Company, the Bank and the stockholders of the Company, give due consideration to all relevant factors, including, without limitation, the social and economic effects of acceptance of such offer on the Company's customers and the Bank's present and future account holders, borrowers and employees; on the communities in which the Company and the Bank operate or are located; and on the ability of the Company to fulfill its corporate objectives as a savings and loan holding company and on the ability of the Bank to fulfill the objectives of a federally chartered stock savings association under applicable statutes and regulations. No assurance can be given that a court applying Delaware law would enforce the foregoing provision of the Certificate of Incorporation. By having these standards in the Certificate of Incorporation of the Company, the Board of Directors may be in a stronger position to oppose such a transaction if the Board concludes that the transaction would not be in the best interest of the Company, even if the price offered is significantly greater than the then market price of any equity security of the Company. Amendment of Certificate of Incorporation and Bylaws. Amendments to the Company's Certificate of Incorporation must be approved by a majority vote of its Board of Directors and also by a majority of the outstanding shares of its voting stock; provided, however, that an affirmative vote of at least 80% of the outstanding voting stock entitled to vote (after giving effect to the provision limiting voting rights) is required to amend or repeal certain provisions of the Certificate of Incorporation, including the provision limiting voting rights, the provisions relating to approval of certain business combinations, calling special meetings, the number and classification of directors, director and officer indemnification by the Company and amendment of the Company's Bylaws and Certificate of Incorporation. The Company's Bylaws may be amended by its Board of Directors, or by a vote of 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders. Certain Bylaw Provisions. The Bylaws of the Company also require a stockholder who intends to nominate a candidate for election to the Board of Directors, or to raise new business at a stockholder meeting to give at least 90 days advance notice to the Secretary of the Company. The notice provision requires a stockholder who desires to raise new business to provide certain information to the Company concerning the nature of the new business, the stockholder and the stockholder's interest in the business matter. Similarly, a stockholder wishing to nominate any person for election as a director must provide the Company with certain information concerning the nominee and the proposing stockholder. 143 ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS AND MANAGEMENT REMUNERATION The provisions described above are intended to reduce the Company's vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by members of its Board of Directors. The provisions of the employment agreement with Mr. Perl and the Stock Option Plans may also discourage takeover attempts by increasing the costs to be incurred by the Bank and the Company in the event of a takeover. See "The Board of Directors and Management of the Bank--Employment Agreements" and "-- Stock Option Plans." The Company's Board of Directors believes that the provisions of the Certificate of Incorporation, Bylaws and management remuneration plans are in the best interest of the Company and its stockholders. An unsolicited non- negotiated proposal can seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the Board of Directors believes it is in the best interests of the Company and its stockholders to encourage potential acquirors to negotiate directly with management and that these provisions will encourage such negotiations and discourage non- negotiated takeover attempts. It is also the Board of Directors' view that these provisions should not discourage persons from proposing a merger or other transaction at a price that reflects the true value of the Company and that otherwise is in the best interest of all stockholders. DELAWARE CORPORATE LAW The State of Delaware has a statute designed to provide Delaware corporations with additional protection against hostile takeovers. The takeover statute, which is codified in Section 203 of the Delaware General Corporate Law ("Section 203"), is intended to discourage certain takeover practices by impeding the ability of a hostile acquiror to engage in certain transactions with the target company. In general, Section 203 provides that a "Person" (as defined therein) who owns 15% or more of the outstanding voting stock of a Delaware corporation (an "Interested Stockholder") may not consummate a merger or other business combination transaction with such corporation at any time during the three- year period following the date such "Person" became an Interested Stockholder. The term "business combination" is defined broadly to cover a wide range of corporate transactions including mergers, sales of assets, issuances of stock, transactions with subsidiaries and the receipt of disproportionate financial benefits. The statute exempts the following transactions from the requirements of Section 203: (i) any business combination if, prior to the date a person became an Interested Stockholder, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an Interested Stockholder; (ii) any business combination involving a person who acquired at least 85% of the outstanding voting stock in the transaction in which he became an Interested Stockholder, with the number of shares outstanding calculated without regard to those shares owned by the corporation's directors who are also officers and by certain employee stock plans; (iii) any business combination with an Interested Stockholder that is approved by the Board of Directors and by a two-thirds vote of the outstanding voting stock not owned by the Interested Stockholder; and (iv) certain business combinations that are proposed after the corporation had received other acquisition proposals and which are approved or not opposed by a majority of certain continuing members of the Board of Directors. A corporation may exempt itself from the requirements of the statute by adopting an amendment to its Certificate of Incorporation or Bylaws electing not to be governed by Section 203. At the present time, the Board of Directors does not intend to propose any such amendment. REGULATORY RESTRICTIONS ON ACQUISITIONS OF THE COMPANY Any proposal to acquire 10% or more of any class of equity security of the Company generally would be subject to approval by the OTS under the Change in Bank Control Act. The OTS requires all persons seeking control of a savings institution, and, therefore, indirectly its holding company, to obtain regulatory approval prior to offering to obtain control. Federal law generally provides that no "person," acting directly or indirectly or 144 through or in concert with one or more other persons, may acquire directly or indirectly "control," as that term is defined in OTS regulations, of a federally-insured savings institution without giving at least 60 days' written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that: (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. Persons holding revocable or irrevocable proxies may be deemed to be beneficial owners of such securities under OTS regulations and therefore prohibited from voting all or the portion of such proxies in excess of the 10% aggregate beneficial ownership limit. Such regulatory restrictions may prevent or inhibit proxy contests for control of the Company or the Bank which have not received prior regulatory approval. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of certain of the principal United States federal income tax consequences of the purchase, ownership and disposition of the Capital Securities to a holder that is a citizen or resident of the United States, a corporation, partnership or other entity created or organized under the laws of the United States or any state thereof or the District of Columbia or an estate or trust the income of which is subject to United States federal income taxation regardless of source or a trust with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more United States fiduciaries have the authority to control all of its substantial decisions (a "U.S. Holder"). This summary does not address the United States federal income tax consequences to persons other than U.S. Holders who purchase Capital Securities upon their initial issuance. This summary is based on the United States federal income tax laws, regulations and rulings and decisions now in effect, all of which are subject to change, possibly on a retroactive basis. This summary does not address the tax consequences applicable to investors that may be subject to special tax rules such as banks, thrifts, real estate investment trusts, regulated investment companies, insurance companies, dealers in securities or currencies, tax-exempt investors or persons that will hold the Capital Securities as a position in a "straddle," as part of a "synthetic security" or "hedge," "conversion transaction" or other integrated investment or as other than a capital asset. This summary also does not address the tax consequences to persons that have a functional currency other than the U.S. dollar or the tax consequences to shareholders, partners or beneficiaries of a holder of Capital Securities. Further, it does not include any description of any alternative minimum tax consequences or the tax laws of any state or local government or of any foreign government that may be applicable to the Capital Securities. PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF CAPITAL SECURITIES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS. The Company intends to take the position that, under current law, the Junior Subordinated Debentures constitute indebtedness for federal income tax purposes and, by acceptance of a Capital Security, each holder covenants to treat the Junior Subordinated Debentures as indebtedness and the Capital Securities as evidence of an indirect beneficial interest in the Junior Subordinated Debentures. No assurances can be given, however, that such position of the Company will not be challenged by the Internal Revenue Service (the "Service") or, if challenged, that such challenge will not be successful. The remainder of this discussion assumes that the Junior Subordinated Debentures are classified as indebtedness for federal income tax purposes. 145 CLASSIFICATION OF THE TRUST Upon the issuance of the Capital Securities, Muldoon, Murphy & Faucette will issue its opinion (the "Tax Opinion") to the effect that, under then current law and assuming full compliance with the terms of the Declaration (and certain other documents), and based on certain facts and assumptions contained in such opinion, the Trust will be classified, for United States federal income tax purposes, as a grantor trust and not as an association taxable as a corporation. As a result, each holder of Capital Securities will be treated as owning an undivided beneficial interest in the Junior Subordinated Debentures and each holder will be required to include in its gross income the items of income realized with respect to its allocable share of those Junior Subordinated Debentures. Investors should be aware that the Tax Opinion does not address any other issue and is not binding on the Service or the courts. INTEREST, ORIGINAL ISSUE DISCOUNT, PREMIUM AND MARKET DISCOUNT Final Treasury Regulations issued on June 16, 1996 generally provide that stated interest on a debt instrument is not "qualified stated interest" and, therefore, will give rise to OID unless such interest is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually at a single fixed rate. Interest is considered to be unconditionally payable only if reasonable legal remedies exist to compel timely payment or the debt instrument otherwise provides terms and conditions that make the likelihood of late payment (other than late payment that occurs within a reasonable grace period) or non-payment a "remote contingency." The Company has the right, at any time and from time to time during the term of the Junior Subordinated Debentures, to defer payments of interest by extending the interest payment period for a period not exceeding 20 consecutive quarters, provided that no Extension Period may extend beyond the Stated Maturity of the Junior Subordinated Debentures. During any Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock, (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company (including any Other Debentures) that rank pari passu with or junior in right of payment to the Junior Subordinated Debentures or (iii) make any guarantee payments with respect to any guarantee by the Company of any securities of any subsidiary of the Company (including Other Guarantees) if such guarantee ranks pari passu with or junior in right of payment to the Junior Subordinated Debentures, other than (a) dividends or distributions in shares of or options, warrants or rights to subscribe for or purchase shares of, Common Stock or preferred stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Guarantee, (d) as a direct result of, and only to the extent required in order to avoid the issuance of fractional shares of capital stock following, a reclassification of the Company's capital stock or the exchange or conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees. See "Description of Junior Convertible Subordinated Debentures--Option to Extend Interest Payment Date." The Company believes that the adverse impact that the imposition of such restrictions would have on the Company and the value of its equity securities makes the likelihood of its exercising its right to defer payments of interest on the Junior Subordinated Debentures remote. Accordingly, the Company believes, and this discussion assumes, that the stated interest on the Subordinated Debentures should be considered unconditionally payable and that the Junior Subordinated Debentures should not be considered to have been issued with OID. If so, stated interest paid or payable prior to the exercise, if any, by the Company, of its right to defer interest payments, will be taxable to a holder as ordinary interest income, generally at the time it is received or accrued, in accordance with such holder's regular method of accounting for federal income tax purposes. There can be no assurance that the Service will agree with the Company's position. 146 Moreover, if, notwithstanding the foregoing, the Company does exercise its right to defer payments of interest thereon, the Junior Subordinated Debentures will be considered to be retired and reissued for their adjusted issue price at such time, and the Junior Subordinated Debentures thereafter will be considered to have been issued with OID. In such case, all the interest payments thereafter payable will be treated as OID. If the payments were treated as OID (either because the Company exercises the right to defer interest payments or because the likelihood of exercise of such right was not remote at the time of issuance), holders must include that discount in income on an economic accrual basis before the receipt of cash attributable to the interest, regardless of their method of tax accounting, and any holders who dispose of Capital Securities prior to the Distribution Record Date for payment of Distributions thereon following such Extension Period will include OID in gross income but will not receive any cash related thereto from the Trust. The amount of OID that accrues in any quarterly period will approximately equal the amount of the interest that accrues in that period at the stated interest rate. In the event that the interest payment period is extended, holders will accrue OID approximately equal to the amount of the interest payment due at the end of the extended interest payment period on an economic accrual basis over the length of the extended interest period. Holders of Capital Securities will not be entitled to a dividends-received deduction with respect to any income earned on the Capital Securities. Holders of Capital Securities other than a holder who purchased the Capital Securities upon original issuance may be considered to have acquired their undivided interests in the Junior Subordinated Debentures with market discount or acquisition premium, as such phrases are defined for United States federal income tax purposes. Such holders are advised to consult their tax advisors as to the income tax consequences of the acquisition, ownership and disposition of Capital Securities. RECEIPT OF JUNIOR SUBORDINATED DEBENTURES UPON LIQUIDATION OF THE TRUST As described under "Description of Capital Securities--Liquidation of the Trust and Distribution of Junior Subordinated Debentures," Junior Subordinated Debentures may be distributed to holders in exchange for the Capital Securities and in liquidation of the Trust. Under current law, such a distribution would be treated as a non-taxable event to each holder and each holder's aggregate tax basis in the Junior Subordinated Debentures would be equal to such holder's aggregate tax basis in its Capital Securities. A holder's holding period in the Junior Subordinated Debentures so received in liquidation of the Trust would include the period for which the Capital Securities were held by such holder. If, however, the liquidation of the Trust were to occur because the Trust is subject to United States federal income tax with respect to income accrued or received on the Junior Subordinated Debentures, the distribution of Junior Subordinated Debentures to the holders of Capital Securities by the Trust would be a taxable event to the Trust and a holder of Capital Securities would recognize gain or loss as if such holder had exchanged its Capital Securities for the Junior Subordinated Debentures it received upon the liquidation of the Trust. A holder will be taxable on OID (if any) in respect of Junior Subordinated Debentures received from the Trust in the manner described above under "--Interest, Original Issue Discount, Premium and Market Discount." SALE OR REDEMPTION OF CAPITAL SECURITIES A holder that sells Capital Securities (including a redemption for cash) will recognize gain or loss equal to the difference between the amount realized on the sale (other than amounts attributable to accrued but unpaid interest which has not yet been included in income, which will be treated as ordinary income) and its adjusted tax basis in the securities sold or redeemed. A holder's adjusted tax basis in the Capital Securities generally will be its initial purchase price increased by OID (if any) previously includible in such holder's gross income to the date of disposition (and the accrual of market discount, if any, if an election to accrue market discount in income currently is made) and decreased by payments received on the Capital Securities (other than payments of qualified stated interest). Except to the extent noted above and subject to the market discount rules of the Internal Revenue Code of 1986, as amended (the "Code"), any such gain or loss generally will be short-term, mid-term or long-term capital gain or loss depending on the length of time the Capital Securities were held. 147 The Capital Securities may trade at a price that does not fully reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A holder who uses the accrual method of accounting (and a cash method holder, during and after an Extension Period or if the Junior Subordinated Debentures are deemed to have been issued with OID) and who disposes of its Capital Securities between Distribution Record Dates will be required to include accrued but unpaid interest (or OID) on the Junior Subordinated Debentures through the date of disposition in income as ordinary income, and to add such amount to its adjusted tax basis in its Capital Securities disposed of. To the extent the selling price (which may not fully reflect the value of accrued but unpaid interest or OID) is less than such holder's adjusted tax basis, a holder will recognize a capital loss. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. CONVERSION OF CAPITAL SECURITIES A holder of Capital Securities generally will not recognize income, gain or loss upon the conversion, through the Conversion Agent, of its Capital Securities into Common Stock. A holder will, however, recognize gain upon the receipt of cash in lieu of a fractional share of Common Stock equal to the amount of cash received less the holder's tax basis in such fractional share. A holder's tax basis in the Common Stock received upon exchange and conversion will generally be equal to the holder's tax basis in the Capital Securities delivered to the Conversion Agent for exchange less that basis allocated to any fractional share for which cash is received, and a holder's holding period in the Common Stock received upon exchange and conversion will generally begin on the date the holder acquired the Capital Securities delivered to the Conversion Agent for exchange. ADJUSTMENT OF CONVERSION PRICE Treasury Regulations promulgated under Section 305 of the Code would treat holders of Capital Securities as having received a constructive distribution from the Company in the event the Conversion Price of the Junior Subordinated Debentures were adjusted if (i) as a result of such adjustment, the proportionate interest (measured by the quantum of Common Stock into or for which the Junior Subordinated Debentures are convertible or exchangeable) of the holders of the Capital Securities in the assets or earnings and profits of the Company were increased, and (ii) the adjustment was not made pursuant to a bona fide, reasonable antidilution formula. An adjustment in the Conversion Price would not be considered made pursuant to such a formula if the adjustment was made to compensate for certain taxable distributions with respect to the Common Stock. Thus, under certain circumstances, a reduction in the Conversion Price for the holders may result in deemed dividend income to holders to the extent of the current or accumulated earnings and profits of the Company. Holders of the Capital Securities would be required to include their allocable share of such deemed dividend income in gross income but would not receive any cash related thereto. BACKUP WITHHOLDING TAX AND INFORMATION REPORTING Subject to the qualifications discussed below, income on the Capital Securities will be reported to holders on Forms 1099, which forms are expected to be mailed to holders of Capital Securities by January 31 following each calendar year. The Trust will be obligated to report annually to the holders of record of the Capital Securities, the interest (or OID) related to the Junior Subordinated Debentures for that year. The Trust currently intends to report such information on Form 1099 prior to January 31 following each calendar year even though the Trust is not legally required to report to record holders until April 15 following each calendar year. Under current law, holders of Capital Securities who hold as nominees for beneficial holders will not have any obligation to report information regarding the beneficial holders to the Trust. The Trust, moreover, will not have any obligation to report to beneficial holders who are not also record holders. 148 Payments made on, and proceeds from the sale of, the Capital Securities may be subject to a "backup" withholding tax of 31% unless the holder complies with certain identification requirements. Any withheld amounts will be allowed as a credit against the holder's federal income tax liability, provided the required information is provided to the Service. THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER THE ALTERNATIVE MINIMUM TAX AND THE STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS. ERISA CONSIDERATIONS If an employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), individual retirement account or other plan within the meaning of Section 4975 of the Code, or persons which are treated as using assets of such employee benefit plans, accounts or plans (collectively, "Plans") acquires Capital Securities, the assets of the Trust may be treated as assets of the investing Plans for purposes of the fiduciary requirements of ERISA and the prohibited transaction provisions of ERISA or Section 4975 of the Code. The Department of Labor has issued final regulations (the "Labor Regulations") as to what constitutes assets of an employee benefit plan under ERISA. The Labor Regulations provide that, as a general rule, when a plan acquires an equity interest in an entity and such interest does not represent a publicly offered security nor a security issued by an investment company registered under the Investment Advisors Act of 1940, the plan's assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless the entity is an operating company or equity participation in the entity by benefit plan investors is not "significant." For purposes of the Labor Regulations, the Trust will not be an investment company nor an operating company and there is no assurance that the Capital Securities will constitute "publicly offered securities" or that benefit plan investor participation in the equity of the Trust will be insignificant. Pursuant to the exception in the Labor Regulations for insignificant equity participation by benefit plan investors, the assets of the Trust would not constitute plan assets of investing Plans at any time if, immediately after the most recent acquisition of any equity interest in the Trust, less than 25% of the value of each class of equity interest in the Trust were held by Plans and other "benefit plan investors," which term includes governmental, church and foreign plans not subject to ERISA and entities deemed to hold assets of such plans. No assurance can be given that the value of Capital Securities held by benefit plan investors will be less than 25% of the total value of such securities at the completion of the Offering or thereafter and no monitoring or other measures will be taken to assure satisfaction of the conditions to this exception. It is also possible that the Capital Securities may qualify for the exemption available to "publicly offered securities," if in addition to being offered pursuant to an effective registration statement, they are registered under the Securities Exchange Act of 1934, are "widely held" at the close of the Offering and are "freely transferable." Under the Labor Regulations, a class of securities is "widely held" only if it is a class of securities held by 100 or more investors independent of the issuer and each other. Although it is possible that the Capital Securities will be "widely held," no measures will be taken to assure that they will be "widely held." Thus, no assurances can be given that the Capital Securities will qualify for the "publicly offered securities" exemption. It is unlikely that the Company, the obligor of the Junior Subordinated Debentures and the Guarantee, would be a party in interest or disqualified person with respect to a Plan before a Plan's acquisition of Capital Securities. However, if the assets of the Trust were considered "plan assets" of Plans holding Capital Securities for purposes of ERISA and Section 4975 of the Code, service providers with respect to the assets of the Trust may 149 become parties in interest or disqualified persons (as defined in ERISA and Section 4975 of the Code, respectively) with respect to investing Plans, and any discretionary authority exercised with respect to the Junior Subordinated Debentures by such persons could be deemed to constitute or give rise to a prohibited transaction under ERISA or the Code. In order to minimize the risk of such prohibited transactions, each investing Plan, by purchasing the Capital Securities, will be deemed to have directed the Trust to invest in the Junior Subordinated Debentures, to enter into the Guarantee and to have appointed the Issuer Trustees. A fiduciary with respect to a Plan subject to ERISA (excluding individual retirement accounts) not sponsored by an employer for its employees should consider whether the purchase of Capital Securities could result in a delegation of fiduciary authority to the Property Trustee, and, if so, whether such a delegation of authority is permissible under the Plan's governing instrument or any investment management agreement with the Plan. In making such determination, a Plan fiduciary should note that the Property Trustee is a U.S. bank qualified to be an investment manager (within the meaning of section 3(38) of ERISA) to which such delegation of authority generally would be permissible under ERISA. Further, prior to an Event of Default with respect to the Junior Subordinated Debentures, the Property Trustee will have only limited custodial and ministerial authority with respect to Trust assets. In addition, unless an exemption applies, the Junior Subordinated Debentures and the Guarantee would constitute a prohibited extension of credit between the Company and Plans holding Capital Securities, if the Company were considered a party in interest or disqualified person. Any purchaser proposing to acquire Capital Securities with assets of any Plan should consult with counsel, particularly regarding the application of the fiduciary and prohibited transaction provisions. Each fiduciary with respect to a Plan who is responsible for the acquisition of Capital Securities by such Plan shall be deemed to have represented and warranted for the benefit of the Company, the Issuer Trustees and the Guarantee Trustee that the acquisition and holding of Capital Securities by such Plan does not result in or give rise to a non-exempt prohibited transaction by reason of the application of the following class exemptions issued by the Department of Labor: Prohibited Transaction Class Exemption ("PTCE") 84-14 (an exemption for certain transactions determined by an independent qualified professional asset manager), PTCE 90-1 (an exemption for certain transactions involving insurance company pooled separate accounts), PTCE 91-38 (an exemption for certain transactions involving bank collective investment funds), PTCE 95-60 (an exemption for transactions involving certain insurance company general accounts) or PTCE 96-23 (an exception for certain transactions determined by an in-house asset manager) or another exemption for which the fiduciary provides a satisfactory opinion of counsel or other evidence of its availability. 150 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement"), the Trust has agreed to sell to the Underwriter, and the Underwriter has agreed to purchase of the Capital Securities at the initial public offering price set forth on the cover page of the Prospectus. In the Underwriting Agreement, the Underwriter has agreed, subject to the terms and conditions set forth therein, to purchase all the Capital Securities offered hereby if any of the Capital Securities are purchased. The Company has been advised by the Underwriter that it proposes initially to offer the Capital Securities to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per Capital Security. The Underwriter may allow, and such dealers may reallow, a discount not in excess of $ per Capital Security on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Trust and the Company have granted the Underwriter an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to an aggregate of additional Capital Securities at the initial public offering price set forth on the cover page of this Prospectus. The Underwriter may exercise such option, in part or in full, only to cover over-allotments, if any, made in connection with the sale of the Capital Securities offered hereby. If purchased, the Underwriter will offer such additional Capital Securities on the same terms as the Capital Securities are being offered. To the extent that the Underwriter exercises such option, the Underwriter will be obligated, subject to certain conditions, to purchase the number of Capital Securities covered by such exercise and the Trust will be obligated to sell such Capital Securities to the Underwriter. In view of the fact that the proceeds of the sale of the Capital Securities will be used to purchase the Junior Convertible Subordinated Debentures of the Company, the Purchase Agreement provides that the Company will pay as compensation ("Underwriter's Compensation") to the Underwriter, for the Underwriter's arranging the investment therein of such proceeds, an amount in same day funds of $ per Capital Security (or $ in the aggregate, or $ in the aggregate if the Underwriter's over-allotment option is exercised in full) for the account of the Underwriter. The Trust and the Company have agreed that they will not, for a period of 90 days after the date of the Prospectus, except with the prior written consent of the Underwriter directly or indirectly sell, offer to sell, grant any option for the sale of, or otherwise dispose of, (a) any trust certificates or other securities of the Trust (other than the Capital Securities offered hereby and the Common Securities issued to the Company), (b) any preferred stock or any other security of the Company that is substantially similar to the Capital Securities, (c) any shares of any class of common stock of the Company (other than (i) shares of Common Stock issuable upon conversion of the Capital Securities or pursuant to the exercise of options or warrants outstanding on the date of this Prospectus, and (ii) the grant of stock options or other stock-based awards (and the exercise thereof) to directors, officers and employees of the Company or any of its subsidiaries) or (d) any debt securities of the Company that are substantially similar to the Junior Convertible Subordinated Debentures (other than the Junior Convertible Subordinated Debentures issued to the Trust). The Company has applied to have the Capital Securities approved for quotation on the Nasdaq, subject to official notice of issuance, under the symbol "LFCOP." Prior to this offering, there has been no public market for the Capital Securities. The Company and the Trust have agreed to indemnify the Underwriter against, or contribute to payments that the Underwriter may be required to make in respect of, certain liabilities, including liabilities under the Securities Act of 1933, as amended. 151 EXPERTS The consolidated financial statements of LIFE Financial Corporation as of December 31, 1996 and for the year then ended included in this Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph referring to the adoption of Statement of Financial Accounting Standards No. 122), and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of LIFE Financial Corporation as of December 31, 1995 and for the year ended December 31, 1995 included in this Prospectus have been audited by Grant Thornton LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon such report given the authority of such firm as experts in accounting and auditing. The financial statements of LIFE Financial Corporation for the year ended December 31, 1994 included in this Prospectus, have been audited by Price Waterhouse LLP, independent accountants, as stated in their report appearing herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. LEGAL MATTERS Certain matters of Delaware law relating to the validity of the Capital Securities will be passed upon on behalf of the Company and the Trust by Prickett, Jones, Elliott, Kristol & Schree, special Delaware counsel to the Company and the Trust. The validity under Delaware law of the Junior Subordinated Debentures and the Guarantee will be passed upon for the Company and the Trust by Muldoon, Murphy & Faucette, Washington, D.C. Certain legal matters will be passed upon for the Underwriter by Brobeck, Phleger & Harrison LLP, Newport Beach, California. ADDITIONAL INFORMATION The Company has filed with the SEC a registration statement under the Securities Act with respect to the securities offered hereby. As permitted by the rules and regulations of the SEC, this Prospectus does not contain all the information set forth in the registration statement. This Prospectus contains a description of the material terms and features of all material contracts, reports or exhibits to the registration statement required to be described; however, the statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete; each such statement is qualified by reference to such contract or document. Such information and all exhibits to the Registration Statement can be examined without charge at the public reference facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the Pacific Regional Office of the Commission at 5670 Wilshire Blvd., 11th Floor, Los Angeles, California 90036-3648, and copies of such material can be obtained from the SEC at prescribed rates. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including the Company. The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. Reports, proxy statements and other information concerning the Company can be inspected and copied or accessed as described above. No separate financial statements of the Trust have been included herein. Neither the Company nor the Trust consider that such financial statements would be material to holders of the Capital Securities because (i) all of the voting securities of the Trust will be owned, directly or indirectly, by the Company, a reporting company under the Exchange Act, (ii) the Trust has no independent operations but exists for the sole purpose of issuing securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof 152 in Junior Subordinated Debentures issued by the Company, and (iii) the Company's obligations described herein to provide certain indemnities in respect of, and be responsible for, certain costs, expenses, debts and liabilities of the Trust under the Indenture and any supplemental indenture thereto and pursuant to the Declaration of the Trust, the Guarantee issued with respect to the Capital Securities issued by the Trust, the Junior Subordinated Debentures purchased by the Trust and the related Indenture, taken together, constitute a full and unconditional guarantee of payments due on the Capital Securities. See "Description of Junior Convertible Subordinated Debentures" and "Description of the Guarantee." In addition, the Company does not expect that the Trust will file reports, proxy statements and other information under the Exchange Act with the Commission. 153 LIFE FINANCIAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants for the year ended December 31, 1994.... F-1 Independent Auditors' Report as of and for the year ended December 31, 1995..................................................................... F-2 Independent Auditors' Report as of and for the year ended December 31, 1996..................................................................... F-3 Consolidated Statements of Financial Condition as of September 30, 1997 (unaudited) and December 31, 1996 and 1995............................... F-4 Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996 (unaudited) and for each of the three years in the period ended December 31, 1996........................................... F-5 Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 1997 (unaudited) and for each of the three years in the period ended December 31, 1996........................................... F-6 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited) and for each of the three years in the period ended December 31, 1996........................................... F-7 Notes to Consolidated Financial Statements................................ F-8
All schedules are omitted because they are not required or applicable, or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of LIFE Financial Corporation In our opinion, the accompanying statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects the results of operations and cash flows of LIFE Financial Corporation (the Company) for the year ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the financial statements of LIFE Financial Corporation for any period subsequent to December 31, 1994. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Los Angeles, California January 31, 1995, except for the "Basis of Presentation and Description of Business" and "Earnings Per Share" paragraphs in Note 1 which are as of June 30, 1997. F-1 INDEPENDENT AUDITORS' REPORT Board of Directors LIFE Financial Corporation We have audited the accompanying statement of financial condition of LIFE Financial Corporation (formerly Life Savings Bank, Federal Savings Bank) as of December 31, 1995, and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1995 financial statements referred to above present fairly, in all material respects, the financial position of LIFE Financial Corporation as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1995 the Bank changed its method of accounting for mortgage servicing rights to conform with Statement of Financial Accounting Standards No. 122. /s/ Grant Thornton LLP Grant Thornton LLP Irvine, California February 8, 1996 (except for the "Earnings Per Share" paragraph of Note 1, as to which the date is June 30, 1997) F-2 INDEPENDENT AUDITORS' REPORT Board of Directors LIFE Financial Corporation We have audited the accompanying consolidated statement of financial condition of LIFE Financial Corporation and subsidiary (the Company) as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 1996 consolidated financial statements present fairly, in all material respects, the financial position of LIFE Financial Corporation and subsidiary as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1995, the Company changed its method of accounting for mortgage servicing rights to conform with Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Costa Mesa, California February 7, 1997 (March 14, 1997 as to Note 16) F-3 LIFE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, ----------------- 1997 1996 1995 ------------- -------- ------- (UNAUDITED) ASSETS Cash and cash equivalents..................... $ 12,872 $ 13,265 $ 3,932 Restricted cash............................... 10,856 1,636 Securities held to maturity, estimated fair value of $7,029 (1997) (unaudited), $7,981 (1996) and $1,985 (1995)..................... 7,015 8,023 1,985 Residual assets, at fair value................ 24,533 5,700 Loans held for sale........................... 191,555 31,018 21,688 Loans held for investment, net of allowance for estimated loan losses of $1,859 (1997) (unaudited), $1,625 (1996) and $1,177 (1995)....................................... 32,133 36,895 41,693 Mortgage servicing rights..................... 5,713 2,645 683 Accrued interest receivable................... 1,714 537 507 Foreclosed real estate, net................... 975 561 827 Premises and equipment, net................... 3,770 1,579 976 Federal Home Loan Bank stock.................. 1,050 814 715 Deferred income taxes......................... 131 397 138 Other assets.................................. 1,785 940 992 -------- -------- ------- TOTAL ASSETS.............................. $294,102 $104,010 $74,136 ======== ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposit accounts............................ $159,840 $ 85,711 $67,535 Other borrowings............................ 61,523 3,278 Subordinated debentures..................... 10,000 Accounts payable and other liabilities...... 13,262 5,748 2,333 -------- -------- ------- Total liabilities......................... 244,625 94,737 69,868 COMMITMENTS AND CONTINGENCIES (NOTE 11) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares outstanding... Common stock, $.01 par value; 25,000,000 shares authorized; 6,546,716 (1997) (unaudited), 3,211,716 (1996) and 933,108 (1995) shares issued and outstanding....... 65 32 9 Additional paid-in capital.................. 41,834 9,358 3,393 Retained earnings (deficit), partially restricted................................. 7,578 (117) 866 -------- -------- ------- Total stockholders' equity................ 49,477 9,273 4,268 -------- -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $294,102 $104,010 $74,136 ======== ======== =======
See notes to consolidated financial statements. F-4 LIFE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------- ----------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (UNAUDITED) INTEREST INCOME: Loans.................... $ 10,001 $ 4,674 $ 6,542 $ 5,433 $ 4,530 Securities held to maturity................ 334 55 56 159 138 Other interest-earning assets.................. 1,817 193 331 233 156 --------- --------- --------- --------- --------- Total interest income.. 12,152 4,922 6,929 5,825 4,824 --------- --------- --------- --------- --------- INTEREST EXPENSE: Deposit accounts......... 5,440 2,507 3,514 3,192 2,534 Federal Home Loan Bank advances and other borrowings.............. 888 192 252 256 187 Subordinated debentures.. 773 --------- --------- --------- --------- --------- Total interest expense............... 7,101 2,699 3,766 3,448 2,721 --------- --------- --------- --------- --------- NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES............... 5,051 2,223 3,163 2,377 2,103 PROVISION FOR ESTIMATED LOAN LOSSES............... 900 359 963 1,194 1,306 --------- --------- --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES............... 4,151 1,864 2,200 1,183 797 NONINTEREST INCOME: Loan servicing and other fees.................... 413 321 496 231 164 Service charges on deposit accounts........ 94 93 128 111 84 Net gains from mortgage financing operations.... 17,413 3,759 8,352 3,575 1,428 Other income............. 265 91 136 103 12 --------- --------- --------- --------- --------- Total noninterest income................ 18,185 4,264 9,112 4,020 1,688 NONINTEREST EXPENSE: Compensation and benefits................ 5,534 3,206 5,233 2,544 1,575 Premises and occupancy... 805 538 746 471 418 Data processing.......... 524 281 390 208 167 Net loss on foreclosed real estate............. 94 171 158 53 280 FDIC insurance premiums.. 69 136 174 184 186 SAIF special assessment.. 448 448 Marketing................ 195 119 189 65 55 Telephone................ 439 159 246 143 128 Professional services.... 243 137 218 92 86 Other expense............ 1,247 623 879 629 561 --------- --------- --------- --------- --------- Total noninterest expense............... 9,150 5,818 8,681 4,389 3,456 --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)... 13,186 310 2,631 814 (971) INCOME TAX PROVISION (BENEFIT)................. 5,491 142 1,126 294 (300) --------- --------- --------- --------- --------- NET INCOME (LOSS).......... $ 7,695 $ 168 $ 1,505 $ 520 $ (671) ========= ========= ========= ========= ========= EARNINGS (LOSS) PER SHARE.. $ 1.70 $ 0.08 $ 0.63 $ 0.28 $ (0.36) ========= ========= ========= ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING............... 4,522,251 2,090,466 2,370,779 1,866,216 1,866,216 ========= ========= ========= ========= =========
See notes to consolidated financial statements. F-5 LIFE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL ---------------- PAID-IN EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY --------- ------ ---------- --------- ------------- BALANCE, January 1, 1994.. 933,108 $ 9 $ 3,393 $ 1,017 $ 4,419 Net loss.................. (671) (671) --------- --- ------- ------- ------- BALANCE, December 31, 1994..................... 933,108 9 3,393 346 3,748 Net income................ 520 520 --------- --- ------- ------- ------- BALANCE, December 31, 1995..................... 933,108 9 3,393 866 4,268 Stock split effected in the form of a dividend... 933,108 9 2,479 (2,488) Net proceeds from issuance of common stock.......... 1,345,500 14 3,486 3,500 Net income................ 1,505 1,505 --------- --- ------- ------- ------- BALANCE, December 31, 1996..................... 3,211,716 32 9,358 (117) 9,273 Unaudited: Net proceeds from issu- ance of common stock... 3,335,000 33 32,476 32,509 Net income.............. 7,695 7,695 --------- --- ------- ------- ------- BALANCE, September 30, 1997 (unaudited)......... 6,546,716 $65 $41,834 $ 7,578 $49,477 ========= === ======= ======= =======
See notes to consolidated financial statements. F-6 LIFE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------- ------------------------------ 1997 1996 1996 1995 1994 -------- --------- --------- --------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........ $ 7,695 $ 168 $ 1,505 $ 520 $ (671) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization........... 388 215 301 166 179 Provision for estimated loan losses............ 900 359 963 1,194 1,306 Accretion of deferred fees................... (7) (8) (41) (11) (20) Provision for estimated losses on foreclosed real estate............ 62 167 145 104 187 Gain on sale of foreclosed real estate, net.................... (43) (21) (41) (137) (39) Gain on sale and securitization of loans held for sale.......... (16,811) (3,759) (7,868) (3,549) (1,014) Gain on bulk sale of mortgage servicing rights................. (26) (414) Unrealized gain on residual asset......... (602) (484) Net accretion of residual asset......... (1,056) (29) Change in valuation allowance on mortgage servicing rights....... 247 (12) (12) 13 Amortization of mortgage servicing rights....... 694 177 320 268 20 Purchase and origination of loans held for sale, net of loan fees....... (450,128) (151,234) (227,156) (135,552) (72,613) Proceeds from sales and securitization of loans held for sale.......... 277,567 143,026 212,226 130,086 66,408 Increase in restricted cash................... (9,477) (1,636) (Increase) decrease in accrued interest receivable............. (1,177) 26 (30) (76) (2) Deferred income taxes... (266) (259) (81) 51 Decrease (increase) in income taxes receivable............. (117) 479 (64) Increase in accounts payable and other liabilities............ 7,514 803 3,415 1,618 86 Federal Home Loan Bank stock dividend......... (41) (43) (34) (30) (20) Decrease (increase) in other assets........... 13 (81) 52 (315) (271) -------- --------- --------- --------- -------- Net cash used in operating activities.. (184,528) (10,334) (18,663) (5,329) (6,891) CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in loans.... 7,246 9,690 8,578 6,428 8,133 Proceeds from sale of foreclosed real estate.. 776 1,118 1,471 1,097 1,424 Purchase of securities held to maturity........ (2,000) (8,013) (8,969) (991) Proceeds from maturities of securities held to maturity................ 3,000 1,975 1,975 9,241 2,042 Purchase of mortgage servicing rights........ (706) (128) Proceeds from bulk sales of servicing rights..... 632 522 Additions to premises and equipment, net.......... (2,541) (236) (904) (523) (33) Purchase of Federal Home Loan Bank stock......... (195) (44) (65) (82) (8) Cash received on residual assets.................. 3,322 -------- --------- --------- --------- -------- Net cash provided by investing activities.. 9,608 12,503 3,042 7,118 10,961 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposit accounts..... 74,129 5,791 18,176 1,846 (6,319) Increase (decrease) in Federal Home Loan Bank advances................ 6,900 (1,250) 50 Net proceeds from other borrowings.............. 51,345 3,278 Net proceeds from issuance of common stock................... 32,509 3,500 3,500 Net proceeds from issuance of subordinated debentures.............. 9,644 -------- --------- --------- --------- -------- Net cash provided by (used in) financing activities............ 174,527 9,291 24,954 596 (6,269) -------- --------- --------- --------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............. (393) 11,460 9,333 2,385 (2,199) CASH AND CASH EQUIVALENTS, beginning of period............... 13,265 3,932 3,932 1,547 3,746 -------- --------- --------- --------- -------- CASH AND CASH EQUIVALENTS, end of period.................. $ 12,872 $ 15,392 $ 13,265 $ 3,932 $ 1,547 ======== ========= ========= ========= ======== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid............ $ 5,300 $ 2,513 $ 3,773 $ 3,418 $ 2,729 ======== ========= ========= ========= ======== Income taxes paid (refunded).............. $ 3,524 $ 172 $ 267 $ 191 $ (290) ======== ========= ========= ========= ======== NONCASH INVESTING ACTIVITIES DURING THE PERIOD: Transfers from loans held for sale to loans held for investment.......... $ -- $ -- $ 856 $ -- $ -- ======== ========= ========= ========= ======== Transfers from loans held for investment to loans held for sale........... $ -- $ -- $ -- $ -- $ 10,090 ======== ========= ========= ========= ======== Transfers from loans to foreclosed real estate.. $ 1,496 $ 1,983 $ 2,070 $ 1,983 $ 1,871 ======== ========= ========= ========= ======== Loans to facilitate sales of foreclosed real estate.................. $ 287 $ 553 $ 761 $ 647 $ 1,516 ======== ========= ========= ========= ======== NONCASH FINANCING ACTIVITIES DURING THE PERIOD-- Stock dividends paid.... $ -- $ 2,488 $ 2,488 $ -- $ -- ======== ========= ========= ========= ========
See notes to consolidated financial statements. F-7 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Insofar as these financial statements and notes relate to information at September 30, 1997 and for the nine month periods ended September 30, 1997 and 1996, they are unaudited. In the opinion of management, such unaudited financial statements and notes thereto reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for such periods. The financial position at September 30, 1997 and results of operations for the nine months then ended are not necessarily indicative of the financial position that may be expected at December 31, 1997 or results of operations that may be expected for the year ending December 31, 1997. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Description of Business--The consolidated financial statements include the accounts of LIFE Financial Corporation (Life) and its wholly-owned subsidiary, Life Bank (formerly Life Savings Bank, Federal Savings Bank) (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Life is a savings and loan holding company incorporated in the State of Delaware that was initially organized for the purpose of acquiring all of the capital stock of the Bank through the holding company reorganization (the "Reorganization") of the Bank, which was consummated on June 27, 1997. Pursuant to the Reorganization, Life issued 3,211,716 shares of common stock in exchange for the 1,070,572 shares of the Bank's outstanding common stock and accordingly the Bank became a wholly-owned subsidiary of Life. Such business combination was accounted for at historical cost in a manner similar to a pooling of interests. On June 30, 1997 the Company completed its sale of 2,900,000 additional shares of its common stock through an initial public offering. On July 2, 1997, the Company issued 435,000 shares of common stock to the public through the exercise of the underwriter's overallotment option, bringing the total shares outstanding to 6,546,716. The consolidated financial condition and results of operations of the Company for periods prior to the date of the Reorganization consist of those of the Bank. The Company originates, purchases, sells and services nonconventional mortgage loans principally secured by first and second mortgages on one- to four-family residences. The Company focuses on loans for the purchase or refinance of residential real property by borrowers who, because of prior credit problems or the absence of a credit history, are considered "subprime borrowers." The Company also originates debt consolidation loans for up to 125% of the loan to value ratio of such loans for borrowers whose credit history qualifies for loans under federal agency programs. The Company purchases and originates mortgage loans and other real estate secured loans through a network of approved correspondents and mortgage brokers on a nationwide basis, as well as through the Company's retail lending division. Except for a limited number of loans specifically originated for retention in the Company's portfolio as loans held for investment, since 1994, loans originated or purchased are generally originated for sale in the secondary mortgage market or in asset securitizations. The Company generally retains the majority of the servicing rights to the loans sold or securitized and may sell servicing rights at a later date depending on market opportunities. In addition, the Company purchases and originates for resale in the secondary market, smaller commercial real estate and multi-family loans. The Company funds substantially all of the loans which it purchases or originates through deposits from customers concentrated in the communities surrounding its home office in San Bernardino County, internally generated funds, advances from the Federal Home Loan Bank and other borrowings. The Company has recently begun to focus efforts on the origination of multi- family and commercial real estate as well as consumer-oriented loans secured by real estate, primarily home equity lines of credit and second F-8 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 trust deeds. Specifically, the Company has targeted borrowers seeking loans secured by multi-family properties or properties used for commercial business purposes such as small office buildings or light industrial or retail facilities. Such loans are generally originated for sale. Securities Held to Maturity--Investments in debt securities that management has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Loans--The Company's real estate loan portfolio consists of long-term loans secured by first and second trust deeds on single-family residences. The Company primarily originates mortgage loans for sale in the secondary market. At origination or purchase, mortgage loans are designated as held for sale or held for investment. Loans held for sale are carried at the lower of cost or estimated market value determined on an aggregate basis by outstanding investor commitments or current investor requirements and include related loan origination costs and fees, as well as premiums or discounts for purchased loans. Net unrealized losses, if any, are recognized in a valuation allowance by charges to operations. Any transfers of loans held for sale to the investment portfolio are recorded at the lower of cost or estimated market value on the transfer date. At September 30, 1997 and December 31, 1996, respectively, the principal balance of loans held for sale consist of $149,800,000 and $25,414,000 in single family residential mortgage loans, $15,963,000 and $2,628,000 in multi-family residential mortgage loans, $14,193,000 and $2,412,000 in commercial mortgage loans and $6,682,000 and $0 in other loans. At December 31, 1995, all loans held for sale are single family residential mortgage loans. Loans held for investment are carried at amortized cost and net of deferred loan origination fees and costs and allowance for estimated loan losses. Net deferred loan origination fees and costs on loans are amortized or accreted using the interest method over the expected lives of the loans. Amortization of deferred loan fees is discontinued for nonperforming loans. Loans held for investment are not adjusted to the lower of cost or estimated market value because it is management's intention, and the Company has the ability to, hold these loans to maturity. Interest on loans is credited to income as earned. Interest receivable is accrued only if deemed collectible. Generally, allowances are established for uncollected interest on loans on which payments are more than 90 days past due. On January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No.114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-- Income Recognition and Disclosures. SFAS No. 114 generally requires all creditors to account for impaired loans, except those loans that are accounted for at fair value or at the lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. SFAS No. 114 indicated that a creditor should evaluate the collectibility of both contractual interest and contractual principal when assessing the need for a loss accrual. The adoption of these statements did not have a material impact on the results of operations or the financial position of the Company, taken as a whole. The Company considers a loan impaired when it is probable that the Company will be unable to collect all contractual principal and interest payments under the terms of the original loan agreement. Loans are evaluated F-9 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 for impairment as part of the Company's normal internal asset review process. However, in determining when a loan is impaired, management also considers the loan documentation, current loan to value ratios, and the borrower's current financial position. Included as impaired loans are all loans delinquent 90 days or more and all loans that have a specific loss allowance applied to adjust the loan to fair value. The accrual of interest on impaired loans is discontinued after a 90-day delinquent period or when, in management's opinion, the borrower may be unable to meet payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reverse. Interest income is subsequently recognized only to the extent cash payments are received. Where impairment is considered other than temporary, a charge- off is recorded; where impairment is considered temporary, an allowance is established. Impaired loans which are performing under the contractual terms are reported as performing loans, and cash payments are allocated to principal and interest in accordance with the terms of the loans. The Company uses the fair value of collateral method for measuring impaired loans. The Company applies such measurement provision to all loans in its portfolio except for one-to-four-family residential mortgage loans and unsecured consumer loans, which are collectively evaluated for impairment. Allowances for Estimated Loan and Real Estate Losses--It is the policy of the Company to maintain allowances for estimated loan and real estate losses at levels deemed appropriate by management to provide for known or inherent risks in the portfolio. Specific loss allowances are established for loans that are deemed impaired if the fair value of the loan or the collateral is estimated to be less than the gross carrying value of the loan. In estimating losses, management considers the estimated sales price, cost of refurbishment, payment of delinquent taxes, cost of holding the property (if an extended period is anticipated) and cost of disposal. Additionally, general valuation allowances for loan and real estate losses have been established. Management's determination of the adequacy of the loan and real estate loss allowances is based on an evaluation of the composition of the portfolio, actual loss experience, current and prospective economic conditions, industry trends and other relevant factors, such as the recent adverse economic conditions experienced (including declining real estate values) in the area in which the Company's lending and real estate activities are based, which may affect the borrower's ability to pay and the value of the underlying collateral. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. Although management uses the best information available to make these estimates, future adjustments to the allowances may be necessary due to economic, operating, regulatory and other conditions that may be beyond the Company's control. Mortgage Financing Operations--The Company sells and securitizes the majority of loans held for sale with servicing retained. Under the servicing agreements, the investor is paid its share of the principal collections together with interest at an agreed-upon rate, which generally differs from the loans' contractual interest rate. Such differences result in a "loan servicing spread." Effective July 1, 1995, the Company adopted SFAS No. 122, Accounting for Mortgage Servicing Rights, which amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. SFAS No. 122 requires an institution that purchases or originates mortgage loans and sells or securitizes those loans with servicing rights retained to allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The impact of adopting SFAS No. 122 was an increase in pretax income of $594,000, net income of $438,000 and earnings per share of $.23 for the year ended December 31, 1995. F-10 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 In addition, SFAS No. 122 requires that all capitalized mortgage servicing rights (MSRs) be evaluated for impairment based on the fair value of those rights. The Company's periodic evaluation is performed on a disaggregated basis whereby MSRs are stratified based upon type of interest rate (variable or fixed), loan type and original loan term. Impairment is recognized in a valuation allowance for each pool in the period of impairment. The Company determines fair value based on the present value of estimated net future cash flows related to servicing income. In estimating fair values at December 31, 1996, the Company utilized a weighted average prepayment assumption of 23% and a weighted average discount rate of 16.5%. The cost allocated to servicing rights is amortized in proportion to and over the period of estimated net future servicing fee income. Prior to adoption of SFAS No. 122, the Company used the methodology set forth in Emerging Issues Task Force No. 88-11, Allocation of Recorded Investment When a Loan or Part of a Loan is Sold, in accounting for loan sales. Gains on bulk sales of mortgage loan servicing rights are recognized when title and all risks and rewards have irrevocably passed to the buyer and there are no significant unresolved contingencies. Residual Assets--During the nine months ended September 30, 1997 and the year ended December 31, 1996, the Company completed the securitization and sale of approximately $204,000,000 and $51,900,000, respectively, in loans held for sale in the form of mortgage pass-through certificates and recognized gains of approximately $17,000,000 and $4,300,000, respectively. These certificates are held in a trust independent of the Company. The Company will act as servicer for the trust and receive a stated servicing fee. The Company has also retained a beneficial interest in the form of an interest-only strip which represents the subordinated right to receive cash flows from the pool of securitized loans after payment of the required amounts to the holders of the securities and the costs associated with the securitization. This interest- only strip receivable is classified as a trading security and recorded at fair value with any unrealized gains or losses recorded in the results of operations in the period of the change in fair value. For the nine months ended September 30, 1997 and the year ended December 31, 1996, a net unrealized gain of $602,000 and $484,000, respectively, resulting from changes in fair value is included in results of operations. Valuations at origination and at each reporting period are based on discounted cash flow analyses. The cash flows are estimated as the excess of the weighted average coupon on each pool of loans sold over the sum of the pass-through interest rate, a servicing fee, a trustee fee, an insurance fee and an estimate of annual future credit losses related to the prepayment, default, loss, and interest rate assumptions that market participants would use for similar financial instruments subject to prepayment, credit and interest rate risk and are discounted using an interest rate that a purchaser unrelated to the seller of such a financial instrument would demand. At origination, the Company utilized a prepayment assumption ranging from 12.0% to 25.0%, an estimated loss factor assumption ranging from 0.5% to 2.0% and a weighted average discount rate of 13.5% to value the residual assets. The valuation includes consideration of characteristics of the loans including loan type and size, interest rate, origination date, term and geographic location. The Company also uses other available information such as externally prepared reports on prepayment rates, collateral value, economic forecasts and historical default and prepayment rates of the portfolio under review. To the Company's knowledge, there is no active market for the sale of residual assets. The range of values attributable to the factors used in determining fair value is broad. Accordingly, the Company's estimate of fair value is subjective. In connection with certain securitization transactions, the Company initially deposited cash with a trustee and will subsequently deposit a portion of the servicing spread collected on the related loans. Such amounts serve as credit enhancement for the related trust. The amount set aside is available for distribution to investors in the F-11 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 event of certain shortfalls in amounts due to investors. These amounts are subject to increase up to a reserve level as specified in the related securitization documents. Cash amounts on deposit are invested in certain instruments as permitted by the related securitization documents. To the extent amounts on deposit exceed specified levels, distributions are made to the Company; and, at the termination of the related trust, any remaining amounts on deposit are distributed to the Company. The amount on deposit at September 30, 1997 and December 31, 1996 is classified as restricted cash in the accompanying consolidated statement of financial condition. Foreclosed Real Estate--Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of fair value or the balance of the loan at the date of foreclosure through a charge to the allowance for estimated loan losses. After foreclosure, valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its fair value less estimated cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net gain (loss) on foreclosed real estate in the statement of operations. Premises and Equipment--Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using both the straight-line and accelerated methods over the estimated useful lives of the assets, which range from 31 years for buildings, 15 years for leasehold improvements, 7 years for furniture, fixtures and equipment, and 3 years for computer equipment. Income Taxes--The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. If necessary, a valuation allowance is established based on management's determination of the likelihood of realization of deferred tax assets. Derivative Financial Instruments--The Company has entered into various interest rate exchange agreements (swaps) to manage exposure to changes in interest rates. Net interest income (expense) on the swaps resulting from the differential between exchanging floating and fixed rate interest payments is recorded using the accrual method. No interest rate exchange agreements were outstanding as of September 30, 1997 and December 31, 1996 and 1995 (Note 13). In the ordinary course of business, the Company has entered into other off- balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Earnings Per Share--Earnings per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding adjusted retroactively to reflect the three for one stock exchange effected pursuant to the Reorganization and the stock split effected in the form of a dividend during 1996. The 1995 and 1994 per share amounts and weighted average shares outstanding included in the accompanying consolidated financial statements have been restated to reflect the Reorganization and stock split. Presentation of Cash Flows--For purposes of reporting cash flows, cash and cash equivalents include cash and federal funds sold. Generally, federal funds are sold for one-day periods. At September 30, 1997 and December 31, 1996 and 1995, federal funds sold approximated $2,900,000, $10,350,000 and $1,600,000, respectively. F-12 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Use of Estimates--In preparing the Company's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation--In 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation, which encourages companies to account for stock compensation awards based on their fair value at the date the awards are granted. SFAS No. 123 does not require the application of the fair value method and allows for the continuance of current accounting methods, which require accounting for stock compensation awards based on their instrinsic value as of the grant date. However, SFAS No. 123 requires pro forma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this Statement had been applied. The accounting and disclosure requirements of this Statement are effective for financial statements for fiscal years beginning after December 15, 1995. The Company did not adopt the accounting method in SFAS No. 123 with respect to its stock option plans and accounts for such plans in accordance with Accounting Principles Board Opinion No. 25. Recent Accounting Developments--In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which was amended by SFAS No. 127. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial-components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial- components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. SFAS No. 125 superceded SFAS No. 122. Retroactive application of this statement is not permitted. Implementation of SFAS No. 125 did not have a material impact on the Company's results of operations or financial condition. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is effective for financial statements issued for periods ending after December 15, 1997. It replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires the presentation of diluted earnings per share for entities with complex capital structures. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock, such as options, were exercised or converted into common stock. The Company does not believe that SFAS No. 128 will have a material impact on its financial statements. In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income" which is effective for annual and interim periods ending after December 15, 1997. This statement requires that all items that are required to be recognized under accounting standards as comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Management is in the process of determining the impact, if any, this statement will have on the Company. In June 1997, FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which is effective for annual and interim periods ending after December 15, 1997. This statement F-13 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 establishes standards for the method by which public entities report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about product and services, geographical areas, and major customers. Management is in the process of determining the impact, if any, this statement will have on the Company. Reclassifications--Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. 2. REGULATORY CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes, as of September 30, 1997 and December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. Qualitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of September 30, 1997 and December 31, 1996, respectively, management believes that the Bank is considered as well capitalized and adequately capitalized under the regulatory framework for prompt corrective action. As of December 31, 1995, the most recent notification from the Office of Thrift Supervision (OTS) categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well- capitalized or adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since September 30, 1997 that management believes have changed the Bank's category. F-14 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The Bank's actual capital amounts and ratios are also presented in the table:
TO BE ADEQUATELY TO BE WELL CAPITALIZED UNDER CAPITALIZED UNDER PROMPT CORRECTIVE PROMPT CORRECTIVE ACTUAL ACTION PROVISIONS: ACTION PROVISIONS: ------------- ------------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) AS OF SEPTEMBER 1997 (UNAUDITED): Total capital (to risk- weighted assets)....... $27,918 13.49% $16,556 8.00% $ 20,695 10.00% Tier 1 capital (to risk- weighted assets)....... 16,286 7.87% 8,278 4.00% 12,417 6.00% Tier 1 capital (to average assets)........ 16,286 6.19% 10,528 4.00% 13,161 5.00% TO BE ADEQUATELY TO BE WELL CAPITALIZED UNDER CAPITALIZED UNDER PROMPT CORRECTIVE PROMPT CORRECTIVE ACTUAL ACTION PROVISIONS: ACTION PROVISIONS: ------------- ------------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) AS OF DECEMBER 31, 1996: Total capital (to risk- weighted assets)....... $10,446 9.43% $ 8,865 8.0% $ 11,081 10.0% Tier 1 capital (to risk- weighted assets)....... 9,273 8.37% 4,432 4.0% 6,649 6.0% Tier 1 capital (to average assets)........ 9,273 8.90% 4,169 4.0% 5,211 5.0% TO BE ADEQUATELY TO BE WELL CAPITALIZED UNDER CAPITALIZED UNDER PROMPT CORRECTIVE PROMPT CORRECTIVE ACTUAL ACTION PROVISIONS: ACTION PROVISIONS: ------------- ------------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) AS OF DECEMBER 31, 1995: Total capital (to risk- weighted assets)....... $ 4,871 10.17% $ 3,832 8.0% $ 4,789 10.0% Tier 1 capital (to risk- weighted assets)....... 4,268 8.91% 1,916 4.0% 2,874 6.0% Tier 1 capital (to average assets)........ 4,268 5.69% 3,003 4.0% 3,753 5.0%
The Bank has been required by the OTS since the Bank's examination completed August 9, 1996 to compute its regulatory capital ratios based upon the higher of (1) the average of total assets based on month-end results or (2) total assets as of the quarter-end. Under the framework, the Bank's capital levels at December 31, 1996 did not allow the Bank to accept additional brokered deposits without prior approval from the regulators. The Bank had approximately $2,200,000 of brokered deposits at December 31, 1996. This is not expected to materially impact the Bank as it has other sources of funds. The Bank's capital levels at September 30, 1997 allow the Bank to accept brokered deposits without prior approval from the regulators. In accordance with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the OTS established regulations requiring the Bank to maintain (i) tangible capital equal to 1.5% of adjusted total assets, (ii) core capital equal to 3% of adjusted total assets, and (iii) risk-based capital equal to 8% of risk-weighted assets. F-15 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The following table summarizes the OTS regulatory capital requirements under FIRREA for the Bank at September 30, 1997 (unaudited) and December 31, 1996. As indicated in the table, the Bank's capital levels exceed all three of the currently applicable minimum capital requirements.
SEPTEMBER 30, 1997 (UNAUDITED) --------------------------------------------- TOTAL RISK- TANGIBLE CAPITAL CORE CAPITAL BASED CAPITAL ---------------- ------------ ------------- AMOUNT % AMOUNT % AMOUNT % -------- ------ ------- ---- ------- ----- (DOLLARS IN THOUSANDS) Balance at end of period: Equity per Bank financial statements................... $ 16,286 $16,286 $16,286 Adjustments for regulatory capital purposes: Qualifying subordinated debentures.................. 10,000 General valuation allowance.. 1,632 --------- ------ ------- ---- ------- ----- Regulatory capital.............. 16,286 6.19% 16,286 6.19% 27,918 13.49% Minimum capital requirement..... 3,948 1.50 7,896 3.00 16,556 8.00 --------- ------ ------- ---- ------- ----- Excess regulatory capital....... $12,338 4.69% $ 8,390 3.19% $11,362 5.49% ========= ====== ======= ==== ======= =====
DECEMBER 31, 1996 ------------------------------------------------ TOTAL RISK- TANGIBLE CAPITAL CORE CAPITAL BASED CAPITAL ----------------- ------------- -------------- AMOUNT % AMOUNT % AMOUNT % --------- ------- ------- ----- ------- ------ (DOLLARS IN THOUSANDS) Balance at end of year: Equity per Bank financial statements................ $ 9,273 $ 9,273 $ 9,273 Adjustments for regulatory capital purposes--general valuation allowance....... 1,173 --------- ------- ------- ----- -------- ----- Regulatory capital........... 9,273 8.90% 9,273 8.90% 10,446 9.43% Minimum capital requirement.. 1,563 1.50 3,127 3.00 8,865 8.00 --------- ------- ------- ----- -------- ----- Excess regulatory capital.... $ 7,710 7.40% $ 6,146 5.90% $ 1,581 1.43% ========= ======= ======= ===== ======== =====
The OTS issued regulations which set forth the methodology for calculating an interest rate risk component that is being incorporated into the OTS regulatory capital rules. Under the new regulations, only savings institutions with above normal interest rate risk exposure are required to maintain additional capital. This additional capital would increase the amount of a savings institution's otherwise required risk-based capital requirement. The final rule became effective January 1, 1994, and implementation will not begin until the Bank has been notified by the OTS. Management believes that, under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Bank, such as changing interest rates or a further downturn in the economy in areas where the Bank has most of its loans, could adversely affect future earnings and, consequently, the ability of the Bank to meet its future minimum capital requirements. At periodic intervals, both the OTS and the FDIC routinely examine the Bank's financial statements as part of their legally prescribed oversight of the savings and loan industry. Based on these examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings. F-16 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The OTS concluded an examination of the Bank in June 1996. Examination results have been reflected in the financial statements presented herein. Future examinations by the OTS or FDIC could include a review of certain transactions or other amounts reported in the 1997 and 1996 financial statements. Adjustments, if any, cannot presently be determined. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the Funds Act), which, among other things, imposes a special one-time assessment on Savings Association Insurance Fund (SAIF) member institutions, including the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF-assessable deposits held as of March 31, 1995, payable November 27, 1996. The special assessment was recognized as an expense in the third quarter of 1996 and is tax deductible. The Bank took a pretax charge of $448,000 as a result of the SAIF special assessment. The Funds Act also spreads the obligations for payment of the Financing Corporation (FICO) bonds across all SAIF and Bank Insurance Fund (BIF) members. Beginning on January 1, 1997, BIF deposits will be assessed for FICO payments at a rate of 20% of the rate assessed on SAIF deposits. Based on current estimates by the FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points, while SAIF deposits will pay an estimated 6.5 basis points on the FICO bonds. Full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999 provided no savings associations remain as of that time. As a result of the Funds Act, the FDIC recently proposed to lower SAIF assessments to 0 to 27 basis points effective January 1, 1997, a range comparable to that of BIF members. However, SAIF members will continue to make the higher FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an ongoing basis, whether the savings association charter will be eliminated or whether the BIF and SAIF will eventually be merged. F-17 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 3. SECURITIES HELD TO MATURITY The amortized cost and estimated fair value of securities held to maturity are summarized as follows (in thousands):
SEPTEMBER 30, 1997 --------------------------------------- GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ------- -------- ---------- (UNAUDITED) U.S. Treasury and other agency securities....................... $7,006 $14 $ -- $7,020 Mortgage-backed securities........ 9 9 ------ ------- -------- ------ $7,015 $ 14 $ -- $7,029 ====== ======= ======== ======
DECEMBER 31, 1996 ----------------------------------------- GROSS UNREALIZED AMORTIZED ------------------ ESTIMATED COST GAINS LOSSES FAIR VALUE --------- -------- -------- ---------- U.S. Treasury and other agency securities..................... $8,013 $ -- $(42) $7,971 Mortgage-backed securities...... 10 10 ------ -------- -------- ------ $8,023 $ -- $(42) $7,981 ====== ======== ======== ======
DECEMBER 31, 1995 ---------------------------------------- GROSS UNREALIZED AMORTIZED ------------------ ESTIMATED COST GAINS LOSSES FAIR VALUE --------- -------- -------- ---------- U.S. Treasury and other agency securities...................... $1,974 $ -- $ -- $1,974 Mortgage-backed securities....... 11 11 ------ -------- -------- ------ $1,985 $ -- $ -- $1,985 ====== ======== ======== ======
The maturity distribution of securities held to maturity is as follows (in thousands):
SEPTEMBER 30, 1997 ------------------- ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- (UNAUDITED) Due in one year or less.................................. $4,008 $4,010 Due from one to five years............................... 2,998 3,010 Mortgage-backed securities............................... 9 9 ------ ------ $7,015 $7,029 ====== ======
DECEMBER 31, 1996 ------------------- ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- Due in one year or less.................................. $5,000 $4,976 Due from one to five years............................... 3,013 2,995 Mortgage-backed securities............................... 10 10 ------ ------ $8,023 $7,981 ====== ======
F-18 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The weighted average yield on securities held to maturity was 5.93%, 5.47% and 5.41% at September 30, 1997 and December 31, 1996 and 1995, respectively. 4. LOANS HELD FOR INVESTMENT Loans held for investment consisted of the following (in thousands):
DECEMBER 31, SEPTEMBER 30, ---------------- 1997 1996 1995 ------------- ------- ------- (UNAUDITED) Mortgage loans: Residential: One- to four-family......................... $25,586 $28,861 $32,517 Multi-family................................ 453 2,124 2,412 Commercial and land.......................... 7,673 7,247 7,615 ------- ------- ------- 33,712 38,232 42,544 Other loans: Loans secured by deposit accounts............ 128 177 186 Unsecured commercial loans................... 64 67 70 Unsecured consumer loans..................... 123 65 63 ------- ------- ------- 315 309 319 ------- ------- ------- 34,027 38,541 42,863 Less: Deferred loan origination fees (costs)....... 35 21 (7) Allowance for estimated loan losses.......... 1,859 1,625 1,177 ------- ------- ------- 1,894 1,646 1,170 ------- ------- ------- $32,133 $36,895 $41,693 ======= ======= ======= Weighted average interest rate at end of period....................................... 9.33% 8.06% 8.91% ======= ======= =======
The Company grants residential and commercial loans held for investment to customers located primarily in Southern California. Consequently, a borrower's ability to repay may be impacted by economic factors in the region. At September 30, 1997 and December 31, 1996, included in loans held for investment and loans held for sale are adjustable rate loans with principal balances of $122,681,000 and $58,648,000, respectively. Adjustable rate loans are indexed primarily to COFI. F-19 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The following summarizes activity in the allowance for estimated loan losses (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------ ------------------------- 1997 1996 1996 1995 1994 -------- -------- ------- ------- ------- (UNAUDITED) Balance, beginning of period... $ 1,625 $ 1,177 $ 1,177 $ 832 $ 436 Provision for estimated loan losses........................ 900 359 963 1,194 1,306 Recoveries..................... 7 124 219 65 3 Charge offs.................... (673) (632) (734) (914) (913) -------- -------- ------- ------- ------- Balance, end of period......... $ 1,859 $ 1,028 $ 1,625 $ 1,177 $ 832 ======== ======== ======= ======= =======
The Company had nonaccrual loans at September 30, 1997 and December 31, 1996, 1995 and 1994 of $3,073,000, $2,416,000, $1,397,000 and $1,889,000, respectively. If nonaccrual loans had been performing in accordance with their original terms, the Company would have recorded interest income of $10,273,000, $4,774,000, $6,692,000, $5,500,000 and $4,637,000, respectively, instead of interest income actually recognized of $10,001,000, $4,674,000, $6,542,000, $5,433,000, and $4,530,000, respectively, for the nine months ended September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994. At September 30, 1997 and December 31, 1996 and 1995, the Company had impaired loans totaling $3,467,000, $2,878,000 and $1,397,000, respectively, with specific reserves of $227,000, $452,000 and $382,000, respectively. During the nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996 and 1995, the average recorded investment in impaired loans was $2,756,000, $2,227,000, $2,300,000 and $1,980,000, respectively. Total cash collected on impaired loans during the nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996 and 1995 was $1,172,000, $863,000, $1,339,000 and $1,079,000, respectively, of which $1,127,000, $838,000, $1,249,000 and $960,000, respectively, was credited to principal. Interest income of $45,000, $25,000, $90,000 and $119,000 on impaired loans was recognized for cash payments received in the nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996 and 1995, respectively. At September 30, 1997 and December 31, 1996 and 1995, troubled debt restructured loans amounted to $131,000. There were no troubled debt restructurings effected during the nine months ended September 30, 1997 and the year ended December 31, 1996. The Company is not committed to lend additional funds to debtors whose loans have been modified. The Bank is subject to numerous lending-related regulations. Under FIRREA, the Bank may not make real estate loans to one borrower in excess of 15% of its unimpaired capital and surplus except for loans not to exceed $500,000. This 15% limitation results in a dollar limitation of approximately $2,700,000 and $1,567,000 at September 30, 1997 and December 31, 1996, respectively. During 1996, the Company originated a loan for $154,500 to an executive officer. Immediately subsequent to origination, the loan was sold servicing released. 5. MORTGAGE FINANCING OPERATIONS Loans serviced for others at September 30, 1997 and December 31, 1996, 1995 and 1994 totaled $334,114,000, $168,963,000, $189,451,000 and $48,204,000, respectively. F-20 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 In connection with mortgage servicing activities, the Company held funds in trust for others totaling approximately $4,780,000, $957,000, and $934,000 at September 30, 1997 and December 31, 1996 and 1995, respectively. At September 30, 1997 and December 31, 1996 and 1995, $933,000, $266,000 and $19,000, respectively, of these funds are included in deposit accounts of the Bank (subject to FDIC insurance limits). For the nine months ended September 30, 1997 and the year ended December 31, 1996, 23.6% and 34.0%, respectively, of the properties securing loans funded by the Company were located in California, 5.9% and 11.9%, respectively, were located in Utah, 2.3% and 7.6%, respectively, were located in Colorado, 4.8% and 6.8% were located in Florida, 5.8% and 3.2%, respectively, were located in Virginia, 5.4% and 3.9%, respectively, were located in Maryland, and the remainder were dispersed throughout the country. At September 30, 1997 and December 31, 1996, 33% and 40%, respectively, of the loan servicing portfolio was collateralized by real estate properties located in California. No other state accounted for more than 10%. Although the Company sells without recourse substantially all of the mortgage loans it originates or purchases, the Company retains some degree of risk on substantially all of the loans it sells. In addition, during the period of time that the loans are held for sale, the Company is subject to various business risks associated with the lending business, including borrower default, foreclosure and the risk that a rapid increase in interest rates would result in a decline of the value of loans held for sale to potential purchasers. In connection with its securitizations, the Company is required to repurchase or substitute loans in the event of a breach of a representation or warranty made by the Company. While the Company may have recourse to the sellers of loans it purchased, there can be no assurance of the seller's abilities to honor their respective obligations to the Company. Likewise, in connection with its whole loan sales, the Company enters agreements which generally require the Company to repurchase or substitute loans in the event of a breach of a representation or warranty made by the Company to the loan purchaser, any misrepresentation during the mortgage loan origination process or, in some cases, upon any fraud or early default on such mortgage loans. The remedies available to a purchaser of mortgage loans from the Company are generally broader than those available to the Company against the sellers of such loans, and if a loan purchaser enforces its remedies against the Company, the Company may not be able to enforce whatever remedies the Company may have against such sellers. If the loans were originated directly by the Company, the Company will be solely responsible for any breaches of representations or warranties. In addition, borrowers, loan purchasers, monoline insurance carriers and trustees in the Company's securitizations may make claims against the Company arising from alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of employees, officers and agents of the Company, including appraisers, incomplete documentation and failure by the Company to comply with various laws and regulations applicable to its business. Any claims asserted in the future may result in liabilities or legal expenses that could have a material adverse effect on the Company's results of operations, financial condition and business prospects. F-21 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The following is a summary of activity in mortgage servicing rights (in thousands):
NINE MONTHS ENDED YEAR ENDED DECEMBER SEPTEMBER 30, 31, ------------------ ----------------------- 1997 1996 1996 1995 1994 -------- -------- ------- ------ ------ (UNAUDITED) Balance, beginning of period..... $ 2,645 $ 683 $ 683 $ -- $ -- Additions through originations... 4,009 1,528 2,270 864 Additions through purchase of servicing rights................ 706 128 Amortization..................... (694) (177) (320) (268) (20) Sales............................ (606) (108) Change in valuation allowance.... (247) 12 12 (13) -------- -------- ------- ------ ------ Balance, end of period........... $ 5,713 $ 2,046 $ 2,645 $ 683 $ -- ======== ======== ======= ====== ======
The following is a summary of activity in the valuation allowance for mortgage servicing rights (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ------------- ------------------------- 1997 1996 1996 1995 1994 ------ ------ -------- ---------------- (UNAUDITED) Balance, beginning of period......... $ 1 $ 13 $ 13 $ -- $ -- Additions (reductions) charged (credited) to operations............ 247 (12) (12) 13 Direct write-downs................... ------ ------ ------- ------- -------- Balance, end of period............... $ 248 $ 1 $ 1 $ 13 $ -- ====== ====== ======= ======= ========
Net gains from mortgage financing operations consisted of the following (in thousands):
NINE MONTHS ENDED YEAR ENDED DECEMBER SEPTEMBER 30, 31, ------------------ -------------------- 1997 1996 1996 1995 1994 --------- -------- ------ ------ ------ (UNAUDITED) Gains on sale and securitization of loans held for sale.................. $ 16,811 $ 3,759 $7,868 $3,549 $1,014 Net unrealized gain on residual assets............................... 602 484 Gains on bulk sale of mortgage servicing rights..................... 26 414 --------- -------- ------ ------ ------ $ 17,413 $ 3,759 $8,352 $3,575 $1,428 ========= ======== ====== ====== ======
6. PREMISES AND EQUIPMENT Premises and equipment consisted of the following (in thousands):
DECEMBER 31, SEPTEMBER 30, ---------------- 1997 1996 1995 ------------- ------- ------- (UNAUDITED) Premises.................................. $ 569 $ 569 $ -- Leasehold improvements.................... 1,821 530 614 Furniture, fixtures and equipment......... 2,994 1,787 1,430 ------- ------- ------- 5,384 2,886 2,044 Less accumulated depreciation and amortization............................. (1,614) (1,307) (1,068) ------- ------- ------- $ 3,770 $ 1,579 $ 976 ======= ======= =======
F-22 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The adoption of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, did not have a material impact on the results of operations or the financial condition of the Company. 7. FORECLOSED REAL ESTATE Activity in the allowance for estimated real estate losses is as follows (in thousands):
NINE MONTHS ENDED SEPTEMBER YEAR ENDED 30, DECEMBER 31, ------------- ------------------ 1997 1996 1996 1995 1994 ----- ------ ----- ---- ----- (UNAUDITED) Balance, beginning of period................. $ 65 $ 44 $ 44 $ 29 $ 94 Provision for estimated real estate losses..... 62 167 145 104 187 Recoveries.............. 2 Charge offs............. (52) (102) (126) (89) (252) ----- ------ ----- ---- ----- Balance, end of period.. $ 75 $ 109 $ 65 $ 44 $ 29 ===== ====== ===== ==== =====
Net loss on foreclosed real estate is summarized as follows (in thousands):
NINE MONTHS ENDED SEPTEMBER YEAR ENDED 30, DECEMBER 31, ------------ ----------------- 1997 1996 1996 1995 1994 ----- ----- ---- ----- ---- Net gain on sales of foreclosed real estate... $ (43) $ (21) $(41) $(137) $(39) Other expenses, net........................... 75 25 54 86 132 Provision for estimated real estate losses.... 62 167 145 104 187 ----- ----- ---- ----- ---- Net loss on foreclosed real estate............ $ 94 $ 171 $158 $ 53 $280 ===== ===== ==== ===== ====
8. DEPOSIT ACCOUNTS Deposit accounts are summarized as follows (in thousands):
DECEMBER 31, ------------------------------------------- SEPTEMBER 30, 1997 1996 1995 ---------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE INTEREST RATE AMOUNT INTEREST RATE AMOUNT INTEREST RATE AMOUNT ------------- -------- ------------- ------- ------------- ------- (UNAUDITED) Checking accounts....... 2.46% $ 11,197 2.22% $ 8,947 1.37% $ 6,735 Passbook accounts....... 2.10 3,968 2.10 4,117 2.10 4,842 Money market accounts... 2.99 3,794 2.99 3,217 2.76 4,156 Certificate accounts: Under $100,000........ 5.93 96,391 5.66 49,437 5.70 39,989 $100,000 and over..... 5.99 44,490 5.63 19,993 5.80 11,813 -------- ------- ------- 5.54% $159,840 5.02% $85,711 4.84% $67,535 ======== ======= =======
F-23 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The aggregate annual maturities of certificate accounts are approximately as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (UNAUDITED) Within one year................................... $134,281 $59,438 One to two years.................................. 3,819 6,197 Two to three years................................ 1,290 1,700 Three to four years............................... 451 925 Four to five years................................ 544 613 Thereafter........................................ 496 557 -------- ------- $140,881 $69,430 ======== =======
Interest expense is summarized as follows (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------- ----------------------- 1997 1996 1996 1995 1994 ------ ------ ------- ------- ------- (UNAUDITED) Checking accounts.................. $ 201 $ 73 $ 112 $ 92 $ 95 Passbook accounts.................. 63 71 92 127 157 Money market accounts.............. 67 90 118 144 163 Certificate accounts............... 5,109 2,273 3,192 2,829 2,119 ------ ------ ------- ------- ------- $5,440 $2,507 $ 3,514 $ 3,192 $2,534 ====== ====== ======= ======= =======
9. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS As of September 30, 1997 and December 31, 1996, the Company had an available line of credit with the Federal Home Loan Bank of San Francisco (FHLB) of $19,027,000 and $17,346,000, respectively, which is contingent upon continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. Advances and/or the line of credit are collateralized by pledges of certain real estate loans and securities with an aggregate principal balance of $24,300,000, $20,474,000 and $24,426,000 at September 30, 1997 and December 31, 1996 and 1995, respectively. At September 30, 1997, outstanding FHLB advances totalled $6,900,000. There were no FHLB advances outstanding at December 31, 1996 and 1995. F-24 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The following summarizes activities in advances from the FHLB (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------ -------------------------- 1997 1996 1996 1995 1994 -------- -------- -------- ------- ------- (UNAUDITED) Average balance outstanding............... $ 9,230 $ 3,885 $ 4,259 $ 3,112 $ 1,863 Maximum amount outstanding at any month-end during the period................ 19,950 13,900 13,900 7,600 7,000 Balance outstanding at end of period................. 6,900 -- -- -- 1,250 Weighted average interest rate during the period.... 5.69% 5.92% 5.93% 6.55% 4.87%
At December 31, 1996, the Company had a borrowing of $3,278,000 with an interest rate of 8.43% from a financial institution. The borrowing was collateralized by certain real estate loans with an aggregate principal balance of $3,278,000. The borrowing was repaid on January 17, 1997. As of September 30, 1997, the Company has two warehousing lines of credit available to it from national investment banking firms. The first line allows the Company to draw up to $50 million and expires on May 1, 1998. The second line allows the Company to draw up to $200 million and expires August 20, 1998. An aggregate of $54,623,000 was drawn on these lines as of September 30, 1997 at a weighted average interest rate of 6.92%. Both lines of credit bear interest at a variable rate based on LIBOR. Outstanding borrowings under both lines of credit are collateralized by loans held for sale. These lines of credit contain certain affirmative, negative and financial covenants, with which the Company was in compliance at September 30, 1997. The following summarizes activities in the lines of credit (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------ (UNAUDITED) Average balance outstanding............................. $ 9,757 Maximum amount outstanding at any month-end during period................................................. 54,623 Balance outstanding at end of period.................... 54,623 Weighted average interest rate during the period........ 6.24%
F-25 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10. INCOME TAXES Income taxes are summarized as follows (in thousands):
NINE MONTHS YEAR ENDED DECEMBER ENDED SEPTEMBER 30, 31, ------------------- ---------------------- 1997 1996 1996 1995 1994 ---------- ---------------- ------ ------ (UNAUDITED) Current provision (benefit): Federal...................... $ 4,365 $ 120 $ 1,073 $ 374 $ (352) State........................ 1,392 22 312 1 1 ---------- -------- ------- ----- ------ 5,757 142 1,385 375 (351) ---------- -------- ------- ----- ------ Deferred (benefit) provision: Federal...................... (229) (235) (81) 10 State........................ (37) (24) 41 ---------- -------- ------- ----- ------ (266) (259) (81) 51 ---------- -------- ------- ----- ------ Total income tax provision (benefit).................. $ 5,491 $ 142 $ 1,126 $ 294 $ (300) ========== ======== ======= ===== ======
A reconciliation from the statutory federal income tax rate to the Bank's effective income tax rate is as follows:
NINE MONTHS YEAR ENDED DECEMBER ENDED SEPTEMBER 30, 31, ------------------- ----------------------- 1997 1996 1996 1995 1994 --------- --------- ------ ------ ------- (UNAUDITED) Statutory federal income tax rate.................. 35.0% 35.0% 35.0% 35.0% (35.0)% State taxes, net of federal income tax benefit........ 7.0 7.0 7.2 3.1 Other...................... (0.4) 3.8 0.6 1.1 1.0 --------- --------- ------ ------ ------- 41.6% 45.8% 42.8% 36.1% (30.9)% ========= ========= ====== ====== =======
F-26 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Deferred tax assets (liabilities) were comprised of the following (in thousands):
DECEMBER 31, SEPTEMBER 30, -------------- 1997 1996 1995 ------------- ------ ------ (UNAUDITED) Deferred tax assets: Allowance for loan losses..................... $ 613 $ 479 $ 258 Capital loss carryforward..................... 63 63 63 Loans held for sale........................... 1,005 115 201 Other......................................... 201 301 23 ------- ------ ------ 1,882 958 545 ------- ------ ------ Deferred tax liabilities: Depreciation.................................. (61) (61) (82) Purchased servicing rights.................... (89) (14) Originated servicing rights................... (446) (358) (179) Gain on sale of loans......................... (999) Federal Home Loan Bank dividends.............. (120) (106) (85) ------- ------ ------ (1,715) (525) (360) ------- ------ ------ 167 433 185 Less valuation allowance....................... (36) (36) (47) ------- ------ ------ Net deferred tax asset......................... $ 131 $ 397 $ 138 ======= ====== ======
Gross deferred tax assets are expected to be realized during 1997 through 2001. At December 31, 1996, the Company has approximately $555,000 of net capital loss carryforwards available to offset future capital gains for state tax purposes. If not utilized, the losses would expire in 1998. A valuation allowance has been placed against the portion of this capital loss carryforward for which realization is not more likely than not. The Bank's financial statement equity includes tax bad debt deductions for which no provision for federal income taxes has been made. If distributions to shareholders are made in excess of current or accumulated earnings and profits or if stock of the Bank is partially redeemed, this tax bad debt reserve, which approximates $330,000 at December 31, 1996, will be recaptured into income at the then prevailing federal income tax rate. The related unrecognized deferred tax liability is approximately $116,000. It is not contemplated that the Bank will make any disqualifying distributions that would result in the recapture of these reserves. 11. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK The Company is involved in various legal proceedings associated with normal operations. In the opinion of management, based on the advice of legal counsel, such litigation and claims are expected to be resolved without material effect on the financial position of the Company. F-27 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The Company leases a portion of its facilities from nonaffiliates under operating leases expiring at various dates through 2002. The following schedule shows the minimum annual lease payments, excluding property taxes and other operating expenses, due under these agreements (in thousands) at December 31, 1996: 1997................................................................. $215 1998................................................................. 185 1999................................................................. 179 2000................................................................. 116 2001................................................................. 82 Thereafter........................................................... ---- $777 ====
Rental expense under all operating leases totaled $266,000, $173,000, $232,000, $124,000, and $118,000 for the nine months ended September 30, 1997 and 1996, and for the years ended December 31, 1996, 1995 and 1994, respectively. The Company has negotiated an employment agreement with its chief executive officer. This agreement provides for the payment of a base salary, a bonus based upon performance of the Company and the payment of severance benefits upon termination. Lending Activities--Loans to subprime borrowers present a higher level of risk of default than conforming loans because of the increased potential for default by borrowers who may have had previous credit problems or who do not have any credit history. Loans to subprime borrowers also involve additional liquidity risks, as these loans generally have a more limited secondary market than conventional loans. The actual rates of delinquencies, foreclosures and losses on loans to subprime borrowers could be higher under adverse economic conditions than those currently experienced in the mortgage lending industry in general. While the Company believes that the underwriting procedures and appraisal processes it employs enable it to somewhat mitigate the higher risks inherent in loans made to these borrowers, no assurance can be given that such procedures or processes will afford adequate protection against such risks. The debt consolidation loans the Company originates for agency qualified borrowers are primarily home equity lines of credit and second deeds of trust generally up to 125% of the appraised value of the real estate underlying the loans. In the event of a default on such a loan by a borrower, there generally would be insufficient collateral to pay off the balance of such loan and the Company, as holder of a second position on the property, would likely lose a substantial portion, if not all, of its investment. While the Company believes that the underwriting procedures it employs enable it to somewhat mitigate the higher risks inherent in such loans, no assurance can be given that such procedures will afford adequate protection against such risks. Approximately 65% of the loans included in the securitization transaction completed in 1996 consisted of this type of loan. The Company has been actively involved in the origination, purchase and sale to institutional investors of real estate secured loans and, more recently, in asset securitizations. Generally, the profitability of such mortgage financing operations depends on maintaining a sufficient volume of loans for sale and the availability of purchasers. Changes in the level of interest rates and economic factors affect the amount of loans originated or available for purchase by the Company, and thus the amount of gains on sale of loans and servicing fee income. Changes in the purchasing policies of institutional investors or increases in defaults after funding could substantially reduce the amount of loans sold to such investors or sold through asset securitizations. Any such changes could have a material adverse effect on the Company's results of operations and financial condition. F-28 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The Company's ability to originate, purchase and sell loans through its mortgage financing operations is also significantly impacted by changes in interest rates. Increases in interest rates may also reduce the amount of loan and commitment fees received by the Company. A significant decline in interest rates could also decrease the size of the Company's servicing portfolio and the related servicing income by increasing the level of prepayments. The Company does not currently utilize any specific hedging instruments to minimize exposure to fluctuations in the market price of loans and interest rates with regard to loans held for sale in the secondary mortgage market. Therefore, between the time the Company originates the loans or purchase commitments are issued or asset securitizations are completed, the Company is exposed to downward movements in the market price of such loans due to upward movements in interest rates. The Company depends largely on mortgage brokers and correspondents for its purchases and originations of new loans. The Company's competitors also seek to establish relationships with the Company's mortgage brokers and correspondents. The Company's future results may become increasingly exposed to fluctuations in the volume and cost of its wholesale loans resulting from competition from other purchasers of such loans. Availability of Funding Sources--The Company funds substantially all of the loans which it originates or purchases through deposits, internally generated funds, FHLB advances or other borrowings. The Company competes for deposits primarily on the basis of rates, and, as a consequence, the Company could experience difficulties in attracting deposits to fund its operations if the Company does not continue to offer deposit rates at levels that are competitive with other financial institutions. The Company also uses the proceeds generated by the Company in selling loans in the secondary market or pools of loans in asset securitizations to fund subsequent originations or purchases. On an ongoing basis, the Company explores opportunities to access credit lines as an additional source of funds. To the extent that the Company is not able to maintain its currently available funding sources or to access new funding sources, it would have to curtail its loan production activities or sell loans earlier than is optimal. Any such event would have a material adverse effect on the Company's results of operations and financial condition. Dependence on Securitizations--During the nine months ended September 30, 1997 and in December 1996, the Company completed various loan securitization transactions. The Company derived a significant portion of its income by recognizing such gains on sale of loans. The Company's ability to complete securitizations is affected by several factors, including conditions in the securities markets generally and in the asset-backed securities markets specifically, the credit quality of the Company's loan portfolio and the Company's ability to obtain credit enhancements. Although the Company obtained credit enhancements in its securitizations which facilitated an investment grade rating for the securitization interests, there can be no assurance that the Company will be able to obtain future credit enhancements on acceptable terms or that future securitizations will be similarly rated. Any substantial reduction in the ability of the Company to complete asset securitizations could have a material adverse effect on the Company's results of operations and financial condition. 12. BENEFIT PLANS 401(k) Plan--The Company maintains an Employee Savings Plan (the Plan) which qualifies under section 401(k) of the Internal Revenue Code. Under the Plan, employees may contribute from 1% to 15% of their compensation. The Company will match, at its discretion, 25% of the amount contributed by the employee up to a maximum of 8% of the employee's salary. The amount of contributions made to the Plan by the Company were not material for the years ended December 31, 1996, 1995 and 1994. F-29 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Cash Bonus Plan--The Company adopted a cash bonus plan (the Bonus Plan) effective February 1996. All employees except for commissioned employees and employees with employment contracts are eligible to participate. Approximately $100,000 was accrued pursuant to the Bonus Plan at December 31, 1996. For 1997, the Bonus Plan will pay bonuses in the aggregate of 15% of the after tax profits of the Company in excess of a 15% return on average equity, as defined in the Bonus Plan. Stock Option Plans--On November 21, 1996, the Board of Directors of the Bank adopted the Life Bank 1996 Stock Option Plan (the Bank Option Plan). The Bank Option Plan authorizes the granting of options equal to 321,600 shares of common stock for issuance to executives, key employees, officers and directors. The Bank Option Plan will be in effect for a period of ten years from the adoption by the Board of Directors. Options granted under the Bank Option Plan will be made at an exercise price equal to the fair market value on the date of grant. Awards granted to officers and employees may include incentive stock options, nonstatutory stock options and limited rights which are exercisable only upon change in control of the Bank. Awards granted to nonemployee directors are nonstatutory options. All 1996 options were granted at an exercise price of $3.33 per share. Stock options will become vested and exercisable in the manner specified by the Bank. The options granted by the Bank will vest at a rate of 33.3% per year, beginning on November 21, 1999. No options were exercisable at December 31, 1996. Options for 18,360 shares were exercisable as of September 30, 1997. The following is a summary of activity in the Bank Option Plan during 1996:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- ---------------- Options granted.................................. 321,540 $3.33 ======= ===== Options outstanding at December 31, 1996......... 321,540 $3.33 ======= =====
There was no activity in the Bank Option Plan during the nine months ended September 30, 1997. All options granted have a remaining contractual life of 10 years. The estimated fair value of the options granted during 1996 was $1.66 per share. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Bank Option Plan. No compensation cost has been recognized for its Bank Option Plan. Had compensation cost for the Bank Option Plan been determined based on the fair value at the grant date for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share for the year ended December 31, 1996 would have been reduced to the pro forma amounts indicated below: Net income to common stockholders: As reported............................................... $1,505,000 Pro forma................................................. $1,489,000 Net income per common share: As reported............................................... $.63 Pro forma................................................. $.63
The fair value of options granted under the Bank Option Plan during 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, no volatility, risk-free interest rate of 7% and expected lives of 10 years. F-30 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The Board of Directors of the Company has adopted the Life Financial Corp 1997 Stock Option Plan (the "Company Option Plan"), which became effective upon the completion of the public offering (the Bank Option Plan and the Company Option Plan will sometimes hereinafter be referred to as the "Option Plans"). The Board of Directors of the Company has reserved shares equal to 10% of the issued and outstanding shares of the Company giving effect to the Reorganization and the public offering, including Company options that were exchanged for Bank options pursuant to the Bank Option Plan for issuance under the Option Plans. Stock options with respect to shares of the Bank's Common Stock granted under the Bank Option Plan and outstanding prior to completion of the Reorganization automatically became options to purchase three shares of the Company's Common Stock upon identical terms and conditions. The Company assumed all of the Bank's obligations with respect to the Bank Option Plan. After the Reorganization, the Option Plans became available to directors, officers and employees of the Company and to directors, officers and employees of its direct or indirect subsidiaries, including the Bank, as selected pursuant to the Option Plans and all references to the Bank's Common Stock under the Bank Option Plan are now deemed references to the Company's Common Stock. As of September 30, 1997, 190,500 shares of the Company Option Plan were outstanding at weighted average exercise price of $11.14 per share. The options granted by the Company will vest at a rate of 33.3% per year, beginning on June 30, 2000. No options were exercisable at September 30, 1997. 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying statement of financial condition. During 1988 the Company entered into agreements to pay fixed-rate interest payments in exchange for the receipt of variable market-indexed interest payments (interest rate swaps). The notional principal amount of interest rate swaps outstanding at December 31, 1994 was $2,000,000, all of which matured in 1995. The weighted average fixed payment rate on such swap was 9.23%. At December 31, 1994, the weighted average variable market-indexed interest rate was 5.75%, which is based on LIBOR. The intent of these agreements was to match the maturities of certain liabilities and convert variable rate liabilities into fixed rate. The notional amount of interest rate swaps does not represent exposure to credit loss. No new interest rate swap transactions were entered into during the nine months ended September 30, 1997 and the years ended December 31, 1996 and 1995. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. Since many commitments are expected to expire, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The Company's commitments to extend credit at September 30, 1997 and December 31, 1996 and 1995 totaled $37,942,000, $9,217,000 and $9,933,000, respectively. F-31 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The Company regularly enters into commitments to sell certain dollar amounts of loans to third parties under specific, negotiated terms. The terms include the minimum maturity of the loans, yield to purchaser, servicing spread to the Company, and the maximum principal amount of the individual loans. The Company typically satisfies these commitments from its current production of loans. These commitments have fixed expiration dates and may require a fee. At September 30, 1997 and December 31, 1996 and 1995, the Company had outstanding commitments to sell loans of $21,290,000, $3,072,000 and $250,000, respectively. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
SEPTEMBER 30, 1997 ------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- (IN THOUSANDS) (UNAUDITED) Assets: Cash and cash equivalents............................... $ 12,872 $ 12,872 Restricted cash......................................... 10,856 10,856 Securities held to maturity............................. 7,015 7,029 Residual assets......................................... 24,533 24,533 Loans held for sale..................................... 191,555 195,614 Loans held for investment, net.......................... 32,133 31,968 Mortgage servicing rights............................... 5,713 6,305 FHLB stock.............................................. 1,050 1,050 Liabilities: Deposit accounts........................................ 159,840 159,905 Other borrowings........................................ 61,523 61,523 Subordinated debentures................................. 10,000 10,000
F-32 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
DECEMBER 31, 1996 ------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- (IN THOUSANDS) Assets: Cash and cash equivalents............................... $13,265 $13,265 Restricted cash......................................... 1,636 1,636 Securities held to maturity............................. 8,023 7,981 Residual asset.......................................... 5,700 5,700 Loans held for sale..................................... 31,018 31,288 Loans held for investment, net.......................... 36,895 37,475 Mortgage servicing rights............................... 2,645 2,984 FHLB stock.............................................. 814 814 Liabilities: Deposit accounts........................................ 85,711 86,278 Other borrowings........................................ 3,278 3,278
DECEMBER 31, 1995 ------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- (IN THOUSANDS) Assets: Cash and cash equivalents............................... $ 3,932 $ 3,932 Securities held to maturity............................. 1,985 1,985 Loans held for sale..................................... 21,688 22,125 Loans held for investment, net.......................... 41,693 41,902 Mortgage servicing rights............................... 683 784 FHLB stock.............................................. 715 715 Liabilities: Deposit accounts........................................ 67,535 67,688
The Company utilized the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents--The carrying amount approximates fair value. Restricted Cash--The carrying amount approximates fair value. Securities Held to Maturity--Fair values are based on quoted market prices. Loans Held for Sale--Fair values are based on quoted market prices or dealer quotes. Loans Held for Investment--The fair value of gross loans receivable has been estimated using the present value of cash flow method, discounted using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities, and giving consideration to estimated prepayment risk and credit loss factors. Residual Assets and Mortgage Servicing Rights--Fair values are estimated using discounted cash flows based on current market values. F-33 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 FHLB Stock--The fair value is based on its redemption value. Deposit Accounts--The fair value of checking, passbook and money market accounts is the amount payable on demand at the reporting date. The fair value of certificate accounts is estimated using the rates currently offered for deposits of similar remaining maturities. Subordinated Debentures and Other Borrowings--The carrying amount approximates fair value as the interest rate currently approximates market. Financial Instruments with Off-Balance Sheet Risk--No fair value is ascribed to the Company's outstanding commitments to fund loans since commitment fees are not significant and predominantly all such commitments are variable-rate loan commitments. There were no significant unrealized gains and losses on commitments to sell loans. The fair value estimates presented herein are based on pertinent information available to management as of September 30, 1997 and December 31, 1996 and 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date; and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 15. SEGMENT INFORMATION The Company's operations within the financial services industry principally focus on banking and mortgage financing activities. Information about these segments as of or for the years ended December 31, 1996 and 1995 are as follows (dollars in thousands):
DECEMBER 31, 1996 --------------------------- MORTGAGE BANKING FINANCING TOTAL ------- --------- -------- Revenue for the year............................ $ 3,898 $12,143 $ 16,041 Pre-tax operating income (loss) for the year.... (2,325) 4,956 2,631 Assets employed at year-end..................... 59,943 44,067 104,010 Depreciation and amortization for the year...... 120 501 621 Capital expenditures for the year............... 276 628 904 DECEMBER 31, 1995 --------------------------- MORTGAGE BANKING FINANCING TOTAL ------- --------- -------- Revenue for the year............................ $ 4,207 $ 5,638 $ 9,845 Pre-tax operating income (loss) for the year.... (1,128) 1,942 814 Assets employed at year-end..................... 49,201 24,935 74,136 Depreciation and amortization for the year...... 92 342 434 Capital expenditures for the year............... 56 467 523
F-34 LIFE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 16. SUBORDINATED DEBENTURES On March 14, 1997, the Bank issued subordinated debentures (Debentures) in the aggregate principal amount of $10 million through a private placement and pursuant to a Debenture Purchase Agreement. The Debentures will mature on March 15, 2004 and bear interest at the rate of 13.5% per annum, payable semi- annually. The Debentures qualify as supplementary capital under regulations of the OTS which capital may be used to satisfy the risk-based capital requirements in an amount up to 100% of the Bank's core capital. The Debentures are direct, unconditional obligations of the Bank ranking with all other existing and future unsecured and subordinated indebtedness of the Bank. They are subordinated on liquidation, as to principal and interest, and premium, if any, to all claims against the Bank having the same priority as savings account holders or any higher priority. The Debentures are redeemable at the option of the Bank, in whole or in part, at any time after September 15, 1998, at the aggregate principal amount thereof, plus accrued and unpaid interest, if any. The Bank may substitute Life in its place as obligor on the Debentures (the Substitution). If such Substitution occurs, holders of the Debentures will have the option at September 15, 1998 or at such later time as the Substitution occurs to require Life to purchase all or part of the holder's outstanding Debentures at a price equal to 100% of the principal amount repurchased plus accrued interest through the repurchase date. If the Substitution occurs, upon a change in control of Life, holders of the Debentures will have the option to require Life to purchase all or part of the holder's outstanding Debentures at a price equal to 101% of the principal amount repurchased plus accrued interest through the repurchase date. F-35 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY LIFE FINANCIAL CAPITAL TRUST, LIFE FINANCIAL CORPORATION, OR KEEFE, BRUYETTE & WOODS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF LIFE FINANCIAL CAPITAL TRUST OR LIFE FINANCIAL CORPORATION SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF. ----------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 1 Risk Factors Related to the Capital Securities........................... 15 Risk Factors Related to the Company...................................... 20 Use of Proceeds.......................................................... 28 Price Range of Common Stock and Dividends................................ 28 Ratios of Earnings to Fixed Charges...................................... 29 Accounting Treatment..................................................... 29 Capitalization........................................................... 30 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 31 Business................................................................. 49 Federal and State Taxation............................................... 90 Regulation............................................................... 92 The Board of Directors and Management of the Company..................... 100 The Board of Directors and Management of the Bank ....................... 102 The Trust................................................................ 112 Description of Capital Securities........................................ 112 Description of Junior Convertible Subordinated Debentures................ 126 Description of the Guarantee............................................. 136 Relationship Among the Capital Securities, the Junior Subordinated Debentures and the Guarantee............................................ 138 Description of Capital Stock of the Company.............................. 140 Certain Federal Income Tax Considerations................................ 145 ERISA Considerations..................................................... 149 Underwriting............................................................. 151 Experts.................................................................. 152 Legal Matters............................................................ 152 Additional Information................................................... 152 Financial Statements..................................................... F-1
----------- UNTIL , OR 25 DAYS AFTER COMMENCEMENT OF THE OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO OF LIFE FINANCIAL CORPORATION] LIFE FINANCIAL CAPITAL TRUST % CONVERTIBLE TRUST PREFERRED SECURITIES GUARANTEED, TO THE EXTENT SET FORTH HEREIN, BY LIFE FINANCIAL CORPORATION ----------- PROSPECTUS ----------- KEEFE, BRUYETTE & WOODS, INC. DECEMBER , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the approximate costs and expenses payable in connection with the securities being registered other than the underwriting discounts and commissions. SEC registration fee............................................. $ 7,375 NASD filing fee.................................................. 3,000 Nasdaq Listing Fee............................................... 5,000 Legal fees and expenses.......................................... 75,000 Blue Sky fees and expenses....................................... 5,000 Accounting fees and expenses..................................... 60,000 Trustees' fees and expenses...................................... 27,000 Printing, postage and mailing.................................... 70,000 Miscellaneous.................................................... 7,625 -------- TOTAL............................................................ $265,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. In accordance with the General Corporation Law of the State of Delaware (being Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the Registrant's Certificate of Incorporation provide as follows: TENTH: A. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a Director or an Officer of the Corporation or is or was serving at the request of the Corporation as a Director, Officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a Director, Officer, employee or agent or in any other capacity while serving as a Director, Officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section C hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. B. The right to indemnification conferred in Section A of this Article TENTH shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a Director or Officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, services to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further II-1 right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article TENTH shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a Director, Officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. C. If a claim under Section A or B of this Article TENTH is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expenses of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article TENTH or otherwise shall be on the Corporation. D. The rights to indemnification and to the advancement of expenses conferred in this Article TENTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise. E. The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer, employee or agent of the Corporation or subsidiary or Affiliate or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. F. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article TENTH with respect to the indemnification and advancement of expenses of Directors and Officers of the Corporation. ELEVENTH: A Director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the Director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating II-2 or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. None. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The exhibits and financial statement schedules filed as a part of this Registration Statement are as follows: (a) List of Exhibits (filed herewith unless otherwise noted) 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of LIFE Financial Corporation* 3.2 Bylaws of LIFE Financial Corporation* 4.0 Certificate of Trust of LIFE Financial Capital Trust (the "Trust"), dated December 2, 1997 4.1 Form of Amended and Restated Declaration of the Trust, among the Company, as sponsor, the Administrators party thereto, Delaware Trust Capital Management, as Delaware Trustee, State Street Bank and Trust Company as Property Trustee and the holders from time to time of undivided interests in the assets of the Trust 4.2 Form of Indenture, between the Company and State Street Bank and Trust Company, as Trustee 4.3 Form of Capital Security Certificate (included in the Declaration filed as Exhibit 4.1 to this Registration Statement) 4.4 Form of Junior Subordinated Debenture (included in the Indenture filed as Exhibit 4.2 to this Registration Statement) 4.5 Form of Capital Securities Guarantee Agreement, between the Company and State Street Bank and Trust Company, as Guarantee Trustee 5.0 Opinion of Prickett, Jones, Elliott, Kristol & Schree as to the validity of the Capital Securities+ 5.1 Opinion of Muldoon, Murphy & Faucette as to the validity of the Junior Subordinated Debentures, the Guarantee to be issued by the Company and the Common Stock issuable upon conversion of the Capital Securities 8.0 Opinion of Muldoon, Murphy & Faucette regarding Federal income tax matters+ 23.1 Consent of Grant Thornton LLP 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Deloitte & Touche LLP 23.4 Consent of Muldoon, Murphy & Faucette 23.5 Consent of Prickett, Jones, Elliott, Kristol & Schree+ 24.1 Powers of Attorney (included on signature page) 25.1 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Declaration 25.2 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Indenture 25.3 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Guarantee 27.1 Financial Data Schedule
- -------- * Incorporated herein by reference from the Company's Registration Statement on Form S-4 (filed initially as Form S-1), filed on January 27, 1997, as amended (SEC File No. 333-20497). + To be filed by amendment (B) FINANCIAL STATEMENT SCHEDULES All schedules have been omitted as not applicable or not required under the rules of Regulation S-X. II-4 ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Riverside, State of California, on December 4, 1997. LIFE FINANCIAL CORPORATION By: /s/ Daniel L. Perl --------------------------------- Daniel L. Perl President, Chief Executive Officer and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel L. Perl and L. Bruce Mills, Jr., and each of them, with full power to act without the other, such person's true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in such person's name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or such person's substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Daniel L. Perl President, Chief Executive December 4, 1997 ____________________________________ Officer and Director Daniel L. Perl (principal executive officer) /s/ L. Bruce Mills, Jr. Executive Vice President, December 4, 1997 ____________________________________ Chief Financial Officer, L. Bruce Mills, Jr. Treasurer and Secretary (principal financial and accounting officer) /s/ Ronald G. Skipper Chairman of the Board December 4, 1997 ____________________________________ Ronald G. Skipper /s/ Richard C. Caldwell Director December 4, 1997 ____________________________________ Richard C. Caldwell
II-6
SIGNATURE TITLE DATE --------- ----- ---- /s/ John D. Goddard Director December 4, 1997 ____________________________________ John D. Goddard /s/ Milton E. Johnson Director December 4, 1997 ____________________________________ Milton E. Johnson /s/ Robert K. Riley Director December 4, 1997 ____________________________________ Robert K. Riley
II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Riverside, State of California, on December 4, 1997. LIFE FINANCIAL CORPORATION By: LIFE Financial Corporation, as Sponsor By: /s/ Daniel L. Perl ---------------------------------- Daniel L. Perl President and Chief Executive Officer II-8 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of LIFE Financial Corporation* 3.2 Bylaws of LIFE Financial Corporation* 4.0 Certificate of Trust of LIFE Financial Capital Trust (the "Trust"), dated December 2, 1997 4.1 Form of Amended and Restated Declaration of the Trust, among the Company, as sponsor, the Administrators party thereto, Delaware Trust Capital Management, Inc., as Delaware Trustee, State Street Bank and Trust Company as Property Trustee and the holders from time to time of undivided interests in the assets of the Trust 4.2 Form of Indenture, between the Company and State Street Bank and Trust Company, as Trustee 4.3 Form of Capital Security Certificate (included in the Declaration filed as Exhibit 4.1 to this Registration Statement) 4.4 Form of Junior Subordinated Debenture (included in the Indenture filed as Exhibit 4.2 to this Registration Statement) 4.5 Form of Capital Securities Guarantee Agreement, between the Company and State Street Bank and Trust Company, as Guarantee Trustee 5.0 Opinion of Prickett, Jones, Elliott, Kristol & Schree as to the validity of the Capital Securities+ 5.1 Opinion of Muldoon, Murphy & Faucette as to the validity of the Junior Subordinated Debentures, the Guarantee to be issued by the Company and the Common Stock issuable upon conversion of the Capital Securities 8.0 Opinion of Muldoon, Murphy & Faucette regarding Federal income tax matters+ 23.1 Consent of Grant Thornton LLP 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Deloitte & Touche LLP 23.4 Consent of Muldoon, Murphy & Faucette 23.5 Consent of Prickett, Jones, Elliott, Kristol & Schree+ 24.1 Powers of Attorney (included on signature page) 25.1 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Declaration 25.2 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Indenture 25.3 Form T-1 Statement of Eligibility of State Street Bank and Trust Company to act as trustee under the Guarantee 27.1 Financial Data Schedule
- -------- * Incorporated herein by reference from the Company's Registration Statement on Form S-4 (filed initially as Form S-1), filed on January 27, 1997, as amended (SEC File. No. 333-20497). + To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 ____________ Capital Securities LIFE FINANCIAL CAPITAL TRUST _____% CONVERTIBLE TRUST PREFERRED SECURITIES (Liquidation Amount $___-___ per Capital Security) FORM OF UNDERWRITING AGREEMENT ---------------------- December ___, 1997 KEEFE, BRUYETTE & WOODS, INC. Two World Trade Center New York, New York 10048 Dear Sirs and Mesdames: Life Financial Corporation, a Delaware corporation (the "Company"), Life ------- Financial Capital Trust (the "Trust" and, together with the Company, the ----- "Offerors"), a statutory business trust created under the Business Trust Act - --------- (Chapter 38, Title 12 of the Delaware Code, 12 Del. C. Section 3801 et seq.) (the "Delaware Act") and Life Bank, a federally chartered savings bank (the ------------ "Bank") confirm their agreement with Keefe, Bruyette & Woods, Inc. (the - ----- "Underwriter"), with respect to the sale by the Trust and the purchase by the - ------------ Underwriter of Convertible Trust Preferred Securities, of the Trust ("Capital ------- Securities") and with respect to the grant by the Offerors to the Underwriter of - ---------- the option described in Section 2(b) hereof to purchase all or any part of _______________ additional Capital Securities to cover over-allotments, if any. The aforesaid ______________ Capital Securities (the "Initial Securities") to be ------------------ purchased by the Underwriter and all or any part of the _____________________ Capital Securities subject to the option described in Section 2(b) hereof (the "Option Securities") are hereinafter called, collectively, the "Securities." - ------------------ ---------- The Securities will be guaranteed by the Company, to the extent set forth in the Prospectus (as defined herein), with respect to distributions and payments on liquidation or redemption (the "Guarantee") pursuant to the Capital --------- Securities Guarantee Agreement dated as of December ___, 1997 (the "Guarantee --------- Agreement") between the Company and State Street Bank and Trust Company, as - --------- trustee (the "Guarantee Trustee") and entitled to the benefits of certain backup ----------------- undertakings described in the Prospectus with respect to the Company's agreement pursuant to the Indenture (as defined herein) to pay all expenses relating to the administration of the Trust. Each Security will be convertible, in accordance with the terms of the Securities and the Indenture, at the option of the holder thereof into a Like Amount of Junior Subordinated Debentures (as defined herein), which upon such conversion shall be automatically converted into shares of common stock, par value $.01 per share, of the Company (the "Common Stock"). - ------------- The entire proceeds from the sale of the Securities will be combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the "Common Securities"), and will be invested by the Trust to ----------------- purchase $__________________ aggregate principal amount (plus up to an additional $_____________________ aggregate principal amount if the Underwriter's over-allotment option is exercised) of____% Junior Convertible Subordinated Debentures (the "Junior Subordinated Debentures") to be issued by ------------------------------ the Company. The Common Securities will be guaranteed by the Company, to the extent set forth in the Prospectus, with respect to distributions and payments on liquidation or redemption (the "Common Guarantee" and, together with the ---------------- Guarantee, the "Guarantees") pursuant ---------- to the Common Guarantee Agreement dated as of December ___, 1997 executed by the Company (the "Common Guarantee Agreement" and, together with the -------------------------- Guarantee Agreement, the "Guarantee Agreements"). The Securities and the -------------------- Common Securities will be issued pursuant to the Amended and Restated Declaration of Trust dated as of December ___, 1997 (the "Declaration") ----------- among the Company, as Sponsor, State Street Bank and Trust Company, as Property Trustee (the "Property Trustee"), Delaware Trust Capital Management Inc., as ---------------- Delaware Trustee (the "Delaware Trustee," and collectively with the Property ---------------- Trustee, the "Issuer Trustees"), the Administrators named therein (the --------------- "Administrators") and the holders from time to time of the Trust Securities. - --------------- The Convertible Debentures will be issued pursuant to an Indenture dated as of December ___, 1997 (the "Indenture") between the Company and State Street Bank --------- and Trust Company, as trustee (the "Debenture Trustee"). ----------------- Prior to the purchase and public offering of the Securities by the Underwriter and the Company shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may ----------------- take the form of an exchange of any standard form of written telecommunication between the Company and the Underwriter and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Securities will be governed by this Agreement, as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. The Company is a savings and loan holding company under the provisions of the Savings and Loan Holding Company Act, as amended, whose sole subsidiaries are the Trust, the Bank and Life Investment Holdings, a Delaware corporation ("Life Holdings," and together with the Trust and the Bank, the "Subsidiaries"). ------------- ------------ The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-______) and a - ----------- related preliminary prospectus for the registration of (i) the Securities; (ii) the Guarantee, (iii) the Junior Subordinated Debentures and (iv) the Common Stock issuable upon conversion of the Junior Subordinated Debentures, (the securities set forth in the foregoing clauses (i) through (iv) inclusive, collectively, the "Registered Securities") under the Securities Act of 1933 (the --------------------- "1933 Act"), has filed such amendments thereto, if any, and such amended -------- preliminary prospectuses as may have been required to the date hereof, and will file such additional amendments thereto and such amended prospectuses as may hereafter be required. Such registration statement (as amended, if applicable) and the prospectus constituting a part thereof (including in each case the information, if any, deemed to be part thereof pursuant to Rule 430A(b) of the rules and regulations of the Commission under the 1933 Act (the "1933 Act -------- Regulations")), as from time to time amended or supplemented pursuant to the - ----------- 1933 Act or otherwise, are hereinafter referred to as the "Registration ------------ Statement" and the "Prospectus," respectively, except that if any revised - --------- ---------- prospectus shall be provided to the Underwriter by the Company for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriter for such use. The Offerors understand that the Underwriter propose to make a public offering of the Securities as soon as the Underwriter deems advisable after the Registration Statement becomes effective the Pricing Agreement has been executed and delivered and the Declaration, the Indenture and the Guarantee Agreement have been qualified under the Trust Indenture Act of 1939, as amended (the "1939 ---- Act"). - --- SECTION 1. Representations and Warranties. ------------------------------ (a) The Offerors and the Bank jointly and severally represent and warrant to the Underwriter as of the date hereof, as of the date of the Pricing Agreement (such latter date being hereinafter referred to as the "Representation -------------- Date") and as of the Closing Time referred to in Section 2(a) hereof, and agree - ---- with the Underwriter, as follows: 2 (i) The Registration Statement has been declared effective by the Commission and no stop order has been issued suspending the effectiveness of the Registration Statement, nor, to the best of their knowledge, has a stop order been threatened. The Registration Statement, and any post- effective amendments thereto became or will become effective and at the Representation Date, the Registration Statement complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations (including, without limitation, requirements regarding agreements which must be described in and filed as exhibits to such registration statements) and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the ----------- Underwriter by the Offerors for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement first becomes effective, in which case at the time it is first provided to the Underwriter for such use) and at Closing Time, will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in -------- ------- this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by the Underwriter expressly for use in the Registration Statement or Prospectus. (ii) The accountants who certified the financial statements included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) The financial statements included in the Registration Statement and the Prospectus, together with the related notes, present fairly the financial position of the Company and the Subsidiaries at the dates indicated and the statement of income, stockholders' equity and cash flows of the Company and the Subsidiaries for the periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods ---- involved. The selected financial data and the summary financial information included in the Prospectus have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. (iv) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Company or the Subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and the Subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company or the Subsidiaries on any class of their respective capital stock. 3 (v) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement, the Pricing Agreement, the Indenture, the Junior Subordinated Debentures, the Guarantee Agreements and the Declaration, and to purchase, own and hold the Common Securities issued by the Trust; the Company is duly qualified as a foreign corporation to transact business and is in good standing in California and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business; the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization"; the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of such stock were issued in violation of the preemptive or other similar rights of any securityholder of the Company or the Subsidiaries arising by operation of law, under the certificate of incorporation (or charter or Declaration, as the case may be) or by-laws of the Company or the Subsidiaries or under any agreement to which the Company or any of the Subsidiaries is a party; and, the Registered Securities, the Common Securities, the Common Guarantee, the Indenture, the Guarantee Agreements, the Company's charter and by-laws and the Declaration conform as of the Representation Date and will conform to all statements relating thereto contained in the Registration Statement and the Prospectus. (vi) The Bank has been duly organized and is validly existing as a savings bank under the federal laws of the United States, and Life Holdings has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware; each of these Subsidiaries has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; Life Holdings is duly qualified as a foreign corporation to transact business and is in good standing in California and in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise; the Bank, as a federal savings bank, is not required to qualify as a foreign corporation or otherwise under state law; all of the issued and outstanding capital stock of the Subsidiaries has been duly authorized and validly issued, is fully paid and non-assessable and is directly owned by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of the Subsidiaries was issued in violation of the preemptive or similar rights of any stockholder of such corporation arising by operation of law, under the charter or by- laws of any such subsidiary or under any agreement to which the Company or any of the Subsidiaries is a party. The only direct or indirect subsidiaries of the Company are the Trust, the Bank and Life Holdings. There are no subsidiaries of the Trust, the Bank or Life Holdings. Except for the shares of capital stock of the Subsidiaries owned by the Company, neither the Company nor any of the Subsidiaries owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity. (vii) The Trust has been duly created and is validly existing and in good standing as a business trust under the Delaware Act; the Trust has the power and authority to own property and to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under this Agreement, the Securities, the Common Securities and the Declaration and to comply with its obligations hereunder and thereunder; the Trust is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is necessary, except to the extent that the failure to so qualify would not have a material adverse effect on the Trust; the Trust is not a party to or otherwise bound by any agreement or instrument other than those described in the Registration Statement; the Trust is and will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation, and the Junior Subordinated Debentures will be treated as indebtedness of the Company for United States federal income tax purposes; and the Trust is and will be treated as a consolidated subsidiary of the Company pursuant to generally accepted accounting principles. 4 (viii) The Declaration has been duly authorized by the Company and, at the Closing Time, the Declaration will have been duly executed and delivered by the Company and will be a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equity principles (regardless of whether enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness; and at the Closing Time, the Declaration will have been duly qualified under the 1939 Act. (ix) The Common Securities have been duly authorized by the Declaration and, when issued and delivered by the Trust to the Company against payment of the consideration therefor as described in the Registration Statement, will be validly issued and fully paid and non- assessable undivided beneficial interests in the assets of the Trust and will be entitled to the benefits of the Declaration; the issuance of the Common Securities is not subject to any preemptive or other similar rights; and at the Closing Time, all of the issued and outstanding Common Securities of the Trust will be owned by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (x) The Securities have been duly authorized by the Declaration and, when authenticated in the manner provided for in the Declaration and issued and delivered by the Trust against payment of the consideration therefor set forth in this Agreement, will be validly issued and fully paid and non- assessable undivided beneficial interests in the assets of the Trust and will be entitled to the benefits of the Declaration; the issuance of the Securities is not subject to any preemptive or other similar rights; and holders of Securities will be entitled to the same limitation of personal liability under Delaware law as extended to stockholders of private corporations for profit. (xi) Each of the Guarantee Agreements has been duly authorized by the Company and, at the Closing Time, each of the Guarantee Agreements will have been duly executed and delivered by the Company and will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equity principles (regardless of whether enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness; and at the Closing Time, the Guarantee Agreement will have been duly qualified under the 1939 Act. (xii) The Indenture has been duly authorized by the Company and, at the Closing Time, the Indenture will have been duly executed and delivered by the Company and will be a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equity principles (regardless of whether enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness; and at the Closing Time, the Indenture will have been duly qualified under the 1939 Act. (xiii) The Junior Subordinated Debentures have been duly authorized by the Company; at the Closing Time, the Junior Subordinated Debentures will have been duly executed by the Company and, when issued and delivered in the manner provided for in the Indenture and sold and paid for as described in the Prospectus, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equity principles (regardless of whether 5 enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness, and will be in the form contemplated by, and entitled to the benefits of, the Indenture; and the issuance of the Junior Subordinated Debentures is not and will not be subject to any preemptive or other similar rights. (xiv) The shares of Common Stock issuable by the Company upon conversion of the Junior Subordinated Debentures and the Securities have been duly and validly authorized and reserved for issuance upon such conversion by the Company and such shares, when issued upon such conversion, will be validly issued, fully paid and non-assessable, and the issuance of such shares upon such conversion is not and will not be subject to any preemptive or other similar rights. (xv) The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") up to legally applicable limits, and no ---- proceedings for the termination or revocation of such insurance are pending or, to the best knowledge of the Company and the Bank, threatened. (xvi) The Securities have been duly authorized for issuance and sale to the Underwriter pursuant to this Agreement and, when issued and delivered by the Trust pursuant to this Agreement against payment of the consideration set forth in the Pricing Agreement, will be validly issued and fully paid and non-assessable; the Securities conform to all statements relating thereto contained in the Prospectus; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to preemptive or other similar rights of any securityholder of the Company arising by operation of law, under the charter, Declaration and by-laws of the Company or the Subsidiaries or under any agreement to which the Company or any of the Subsidiaries is a party. (xvii) Neither the Company nor any of the Subsidiaries is in violation of its certificate of incorporation, its charter or Declaration, as the case may be, or in default to an extent which singly or in the aggregate, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or either of the Subsidiaries is a party or by which or any of them may be bound, or to which any of the property or assets of the Company or either of the Subsidiaries is subject, including without limitation: (A) that certain Master Loan and Security Agreement dated April 30, 1997 between the Bank and Morgan Stanley Mortgage Capital, Inc., and any other documents governing such line of credit (collectively the "Line of Credit Documents"); (B) the Amended Agreement and Plan of ------------------------ Reorganization, dated as of January 16, 1997 between the Company and the Bank, and any other documents governing the Reorganization (all such agreements and other documents, collectively, the "Reorganization -------------- Documents"); and (C) all purchase agreements, servicing agreements and any --------- other documents governing loan sales or securitizations by the Company or the Bank (all such agreements and other documents, collectively, the "Securitization Documents"). ------------------------- (xviii) The execution, delivery and performance of this Agreement the Pricing Agreement, the Indenture, the Junior Subordinated Debentures, the Guarantee Agreements, the Declaration, the Certificate of Trust, the Securities and the Common Securities (collectively, the "Operative --------- Instruments"), the consummation of the transactions contemplated herein and ----------- therein (including, without limitation, the issuance and sale of the Securities, Common Securities, Junior Subordinated Debentures and Guarantees and the issuance of shares of Common Stock upon conversion of the Securities and the Junior Subordinated Debentures) and compliance by the Company with its obligations hereunder and thereunder, have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or 6 encumbrance upon any property or assets of the Company, the Trust or the Bank pursuant to, the Line of Credit Documents, the Reorganization Documents, the Securitization Documents, or any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or either of the Subsidiaries is a party or by which it or either of them may be bound, or to which any of the property or assets of the Company or any of the Subsidiaries is subject and which breach or default singly or in the aggregate, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise; nor will such action result in any violation of the provisions of certificate of incorporation, Declaration or charter, as the case may be, or by-laws of the Company or any of the Subsidiaries or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or the Subsidiaries or any of their assets or properties and which violation, singly or in the aggregate, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise. As used herein, a "Repayment Event" means --------------- any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of the Subsidiaries. (xix) Neither the Company nor any of the Subsidiaries is in violation of any directive from the FDIC, the OTS, or any other governmental authority, and the Company and the Subsidiaries are in compliance with all federal and state laws and regulations that regulate or relate to its business, including, without limitation, the Financial Institutions Recovery, Reform and Enforcement Act of 1989 ("FIRREA"), the Federal ------ Deposit Insurance Act (the "FDIA"), the National Housing Act (the "NHA"), ---- --- the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and all other applicable laws and regulations where the failure ------ to comply would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise. Neither the Company nor any of the Subsidiaries is subject to a cease and desist order, a formal or written agreement or a memorandum of understanding with any federal or state agency. (xx) All material transactions between the Company or the Subsidiaries and their respective officers and directors and their affiliates required to be disclosed in the Prospectus have been accurately disclosed in the Prospectus. (xxi) Except as disclosed in the Prospectus or Registration Statement, the Company has not: (A) issued any securities within the last 18 months; or (B) entered into a financial or management consulting agreement, except pursuant to (1) this Agreement, (2) the Underwriting Agreement dated June 24, 1997 with the Underwriter, and (3) the Placement Agency Agreements with Friedman, Billings, Ramsey & Co., Inc. dated July 23, 1996 and March 14, 1997. (xxii) The Company has not relied upon you or your legal counsel for any legal, tax or accounting advice in connection the offering and sale of the Securities. (xxiii) To the best of their knowledge, neither the Offerors and the Bank nor any of the Subsidiaries has violated any Federal, state or local law relating to discrimination in the hiring, promotion or pay of employees, any applicable wage or hour laws, or any provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), or the rules and ----- regulations promulgated thereunder. There is (i) no significant unfair labor practice complaint pending against the Company or any of the Subsidiaries or, to the best knowledge of the Offerors and the Bank, threatened against any of them, before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of the Subsidiaries and, to the best knowledge of the Offerors and the Bank, threatened against any of them, (ii) no 7 labor dispute in which the Company or either of the Subsidiaries is involved nor, to the best knowledge of the Offerors and the Bank, is any labor dispute imminent, other than routine disciplinary and grievance matters; the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal customers or vendors and (iii) no union representation question existing with respect to the employees of the Company or either of the Subsidiaries and, to the best knowledge of the Company and the Bank, no union organizing activities are taking place. (xxiv) There is no action, suit, proceeding, inquiry or investigation before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the best knowledge of the Offerors and the Bank, threatened, against or affecting the Company or any of the Subsidiaries which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of this Agreement or the performance by the Company and the Trust of their obligations hereunder which is required to be described in the Registration Statement and is not accurately described in the Registration Statement; the aggregate of all pending legal or governmental proceedings to which the Company or any of the Subsidiaries is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement are not reasonably be expected to result in a material adverse change in the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise. (xxv) Neither the Company nor any of the Subsidiaries has directly or indirectly: (A) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities; or (B) since the filing of the Registration Statement: (1) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities, or (2) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company or the Trust. (xxvi) Neither the Company nor any of the Subsidiaries or, to the best knowledge of the Offerors and the Bank, any employees of the Company or their Subsidiaries, have at any time during the last five (5) years: (A) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law; or (B) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (xxvii) To the best knowledge of the Offerors and the Bank, no event or series of events has occurred that would result in any of the securities issued in the securitizations described in the Registration Statement and the Prospectus using loans originated by the Bank being downgraded or placed on a watch list with negative implications by any rating agency or similar organization, or that would impair the Company's or any Subsidiary's ability to consummate future loan sales or to securitize loans upon economic terms consistent with past loan sales and securitizations or otherwise cause the Company and any of the Subsidiaries to suffer any material loss with respect to any past loan sale or securitization. (xxviii) The Securities and the Common Stock into which the Securities are ultimately convertible (after the Securities are first converted into Junior Subordinated Debentures) have been approved for quotation on the Nasdaq National Market, subject to official notice of issuance, and the Underwriter has been provided a copy of such approval. (xxix) To the best knowledge of the Offerors and the Bank, the Company and the Subsidiaries are in material compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable -------------------- 8 to their respective businesses; the Company and the Subsidiaries have received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus; the Company and the Subsidiaries have no reason to believe that any of them will be required to make future material capital expenditures to comply with Environmental Laws; and to the best knowledge of the Offerors and the Bank, no property which is owned, leased or occupied by the Company or the Subsidiaries has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated -- ---- site under applicable state or local law. (xxx) No filing with, or authorization, approval, consent, license order, registration, qualification or decree of, any court or governmental authority or agency, including without limitation the OTS and the FDIC is necessary or required for the performance by the Company, the Trust or the Bank of their obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws. (xxxi) The Company and the Subsidiaries possess such certificates, authorities, permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the --------------------- appropriate federal, state, local or foreign regulatory agencies or bodies, including the OTC, FDIC and Federal Reserve Board, necessary to conduct the business now operated by them and described in the Registration Statement and Prospectus; the Company and the Subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a material adverse effect on the condition, financial or otherwise, earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise; and neither the Company nor either of the Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise. (xxxii) The Company and the Subsidiaries are in compliance in all material respects with all applicable laws, statutes, ordinances, rules or regulations, except where the violation of which, individually or in the aggregate, would not be reasonably expected to have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise. (xxxiii) The Company and the Subsidiaries have good and marketable title to all properties (real and personal) owned by the Company and the Subsidiaries, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or the Subsidiaries; and all properties held under lease by the Company or the Subsidiaries are held under valid, subsisting and enforceable leases. (xxxiv) Except as disclosed in the Prospectus, there are no outstanding options, warrants, or other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or the Subsidiaries or any security convertible into or exchangeable for capital stock of the Company or the Subsidiaries. 9 (xxxv) Neither the Company nor any of the Subsidiaries is, nor upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus under the caption "Use of Proceeds" will be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). -------- (xxxvi) The Company and the Subsidiaries have filed all federal, state, local and foreign tax returns that are required to be filed or have duly requested extensions thereof and have paid all taxes required to be paid by any of them and any related assessments, fines or penalties, except for any such tax, assessment, fine or penalty that is being contested in good faith and by appropriate proceedings; and adequate charges, accruals and reserves have been provided for in the financial statements referred to in Section 1(a)(iii) above in respect of all federal, state, local and foreign taxes for all periods as to which the tax liability of the Company or the Subsidiaries has not been finally determined or remains open to examination by applicable taxing authorities. (xxxvii) The Company and the Subsidiaries carry or are entitled to the benefits of insurance in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. (xxxviii) The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general and specific authorizations; (ii) transactions are recorded as necessary to permit preparations of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxxix) Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company or the Subsidiaries any brokerage or finder's fee or any other fee, commission or payment as a result of the offer and sale of the Securities. (xl) The Company has not distributed and, prior to the later to occur of (i) the Closing Time and (ii) completion of the distribution of the Securities, will not distribute any prospectus (as such term is defined in the 1933 Act and the 1933 Act Regulations) in connection with the offering and sale of the Securities other than the Registration Statement, any preliminary prospectus, the Prospectus or other materials, if any, permitted by the 1933 Act or by the 1933 Act Regulations and approved by the Underwriter. (xli) The Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation; accordingly, for United States federal income tax purposes, each holder of Securities generally will be considered the owner of an undivided interest in the Junior Subordinated Debentures. (xlii) The Junior Subordinated Debentures will be classified for United States federal income tax purposes as indebtedness of the Company. (xliii) The Offerors have no present intention to, or knowledge of any facts which would likely result in, the exercise of an Extension Period (as defined in the Indenture), nor do the Offerors have any present intent to, or knowledge of facts which would likely result in a, trigger of a Special Event (as defined in the Indenture). (xliv) As of the date hereof, the amount of Senior Indebtedness (as defined in the Indenture) is $_________. 10 (b) Any certificate signed by any officer of the Company or any Trustee of the Trust and delivered to the Underwriter or to counsel for the Underwriter shall be deemed a representation and warranty by the Company or the Trust to the Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to Underwriter; Closing. ----------------------------------------- (a) On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Trust agrees to sell to the Underwriter and the Underwriter agrees to purchase from the Trust, at the price per Security set forth in the Pricing Agreement, the Initial Securities. (i) If the Trust has elected not to rely upon Rule 430A under the 1933 Act Regulations, the public offering price and the purchase price per share to be paid by the Underwriter for the Securities have each been determined and set forth in the Pricing Agreement, dated the date hereof, and an amendment to the Registration Statement and the Prospectus will be filed before the Registration Statement becomes effective. (ii) If the Trust has elected to rely upon Rule 430A under the 1933 Act Regulations, the public offering price and the purchase price per share to be paid by the Underwriter for the Securities shall be determined by agreement between the Underwriter and the Offerors and, when so determined, shall be set forth in the Pricing Agreement. In the event that such prices have not been agreed upon and the Pricing Agreement has not been executed and delivered by all parties thereto by the close of business on the fourth business day following the date of this Agreement, this Agreement shall terminate forthwith, without liability of any party to any other party, unless otherwise agreed to by the Offerors and the Underwriter, except that Sections 6 and 7 shall remain in effect. (b) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Offerors hereby grants an option to the Underwriter to purchase up to an additional _______ Securities at the price per Security set forth in the Pricing Agreement. The option hereby granted will expire 30 days after (i) the date the Registration Statement becomes effective, if the Offerors has elected not to rely on Rule 430A under the 1933 Act Regulations, or (ii) the Underwriter Date, if the Offerors has elected to rely on Rule 430A under the 1933 Act Regulations, and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Underwriter to the Offerors setting forth the number of Option Securities as to which the several Underwriter are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Underwriter, but shall not be - ----------------- later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time or prior to the date two business days after receipt by the Offerors of notice of the exercise, as hereinafter defined, unless otherwise agreed by the Underwriter and the Offerors. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriter, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Securities (except as otherwise provided in the Pricing Agreement), subject in each case to such adjustments as the Underwriter in their discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment of the purchase price for, and delivery of a certificate for, the Initial Securities shall be made at the office of Brobeck, Phleger & Harrison LLP, Newport Beach, California, or at such other place as shall be agreed upon by the Underwriter and the Offerors, at 10:00 A.M. (unless postponed in accordance with the provisions of Section 10) on the fourth business day following the date the Registration Statement becomes effective (or, if the Offerors have elected to rely upon Rule 430A of the 1933 Act Regulations, the fourth business day after execution of the Pricing Agreement), or such other time not later than ten business days after such date as shall be agreed upon by the Underwriter and the Offerors (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all ------------ of the Option Securities are purchased by the Underwriter, payment of the purchase price for, and 11 delivery of certificate for, such Option Securities shall be made at the above- mentioned offices of Brobeck, Phleger & Harrison LLP, Newport Beach, California, or at such other place as shall be agreed upon by the Underwriter and the Offerors, on each Date of Delivery as specified in the notice from the Underwriter to the Offerors. Payment shall be made to the Offerors by wire transfer or by certified or official bank check or checks drawn in same day funds payable to the order of the Trust, against delivery to the Underwriter of a global certificate for the Securities. A Certificate for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Underwriter may request in writing at least two business days before the Closing Time or the relevant Date of Delivery, as the case may be. Notwithstanding the foregoing, if the Underwriter elects that the delivery of all or a portion of the Securities be effected through the "Full Fast" system of the Depository Trust Corporation, such that all or a portion of the Securities will be denominated in book-entry form and there will be no certificate therefor, then in lieu of the global certificate for the Securities, the Offerors shall deliver to their transfer agent at least 24 hours prior to Closing Time, instructions in form and substance satisfactory to the Underwriter, instructing such transfer agent to register such shares through the Full Fast system at Closing Time. (d) In view of the fact that the proceeds of the sale of the Securities will be invested by the Trust in the Junior Subordinated Debentures, the Company hereby agrees to pay the Underwriter as compensation (the "Underwriter's Compensation") for arranging for the investment therein of such proceeds, $____ per Security purchased by the Underwriter at the Closing Time and each Date of Delivery, if any ($______ in the aggregate assuming no exercise of the Underwriter's over-allotment option or $______ in the aggregate assuming exercise of such over-allotment option in full). Such Underwriter's Compensation shall be payable to the Underwriter by wire transfer of immediately available funds at the Closing Time and at each Date of Delivery (if any) or, if agreed by the Underwriter and the Company, by deduction from the amount payable by the Underwriter to the Trust in respect of the Securities being purchased on such date. SECTION 3. Covenants of the Offerors. Each of the Offerors jointly and ------------------------- severally covenants with each Underwriter as follows: (a) The Offerors will use their best efforts to cause the Registration Statement to become effective as and when requested by the Underwriter, and if the Offerors elects to rely upon Rule 430A and subject to Section 3(b), will comply with the requirements of Rule 430A and will notify the Underwriter immediately, and confirm the notice in writing, (i) when the Registration Statement, or any post-effective amendment to the Registration Statement, shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of or the initiation or threatening of any proceedings for any of such purposes. The Offerors will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest reasonable moment. (b) The Offerors will give the Underwriter notice of their intention to file or prepare any amendment to the Registration Statement (including any post- effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Offerors propose for use by the Underwriter in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement first becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act Regulations), will furnish the Underwriter with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which the Underwriter or counsel for the Underwriter shall object. (c) The Offerors have furnished or will deliver to the Underwriter and counsel for the Underwriter, without charge, copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed 12 therewith or incorporated by reference therein) and copies of all consents and the certificate of experts, and will also deliver to the Underwriter a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for the Underwriter. (d) The Offerors will deliver to the Underwriter, without charge, from time to time until the effective date of the Registration Statement (or, if the Offerors have elected to rely upon Rule 430A, until such time the Pricing Agreement is executed and delivered), as many copies of each preliminary prospectus as the Underwriter may reasonably request, and the Offerors hereby consent to the use of such copies for purposes permitted by the 1933 Act. The Offerors will furnish to the Underwriter, without charge, from time to time during the period when the Prospectus is required to be delivered under the 1933 Act or the Securities Reorganization Act of 1934 (the "1934 Act"), such number -------- of copies of the Prospectus (as amended or supplemented) as the Underwriter may reasonably request for the purposes contemplated by the 1933 Act or the 1934 Act or the respective applicable rules and regulations of the Commission thereunder. (e) If any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriter or for the Company, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Offerors will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the Offerors will furnish to the Underwriter such number of copies of such amendment or supplement as the Underwriter may reasonably request. (f) If, at the time that the Registration Statement becomes effective, any information shall have been omitted therefrom in reliance upon Rule 430A of the 1933 Act Regulations, then immediately following the execution of the Pricing Agreement, the Offerors will prepare, and file or transmit for filing with the Commission in accordance with such Rule 430A and Rule 424(b) of the 1933 Act Regulations, copies of an amended Prospectus, or, if required by such Rule 430A, a post-effective amendment to the Registration Statement (including an amended Prospectus), containing all information so omitted and will use its best efforts to cause such post-effective amendment to be declared effective as promptly as practicable. (g) The Offerors will use their best efforts, in cooperation with the Underwriter, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as the Underwriter may designate and to maintain such qualifications in effect for a period of not less than one year from the effective date of the Registration Statement; provided, however, that neither of the Offerors shall be obligated to qualify as a foreign corporation or trust or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Offerors will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for as long as may be required for the distribution of the Securities or, in the case of such Junior Subordinated Debentures, for as long as such Junior Subordinated Debentures are issuable as contemplated by the Prospectus or, in the case of shares of Common Stock issuable upon conversion of Securities and Junior Subordinated Debentures, for so long as is required by applicable law. The Offerors will promptly advise the Underwriter of the receipt by either of the Offerors of any notification with respect to the suspension of the qualification of the Registered Securities for sale or issuance, as the case may be, in any such state or jurisdiction or the initiating or threatening of any proceedings for such purpose. (h) The Company will, on behalf of the Trust, make generally available to the Trust's security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the 1933 Act Regulations) covering a twelve month period beginning 13 not later than the first day of the Company's fiscal quarter next following the "effective date" (as defined in said Rule 158) of the Registration Statement. (i) The Offerors will use the net proceeds received by it from the sale of the Securities and the Junior Subordinated Debentures in the manner specified in the Prospectus under "Use of Proceeds". (j) During a period of 90 days from the date of the Pricing Agreement (the "Lock-Up Period"), neither the Offerors nor the Bank will, without the prior -------------- written consent of the Underwriter (which may be withheld in its sole discretion), directly or indirectly, (i) sell, pledge, hypothecate, offer to sell, pledge or hypothecate, grant any option for the sale of, or otherwise dispose of, including without limitation a disposition or transfer into nominee or street name (all such forms of disposition or transfer enumerated in this sentence collectively, a "Disposition"), (A) any trust certificate or other ----------- securities of the Trust (other than the Securities and the Common Securities issued to the Company), (B) any preferred stock or any other security of the Company that is substantially similar to the Securities, (C) any shares of any class of common stock of the Company (other than (i) shares of Common Stock issuable upon conversion of the Securities or pursuant to the exercise of options or warrants outstanding on the date hereof and (ii) the grant of stock options or other stock-based awards (and the exercise thereof) to directors, officers and employees of the Company and its Subsidiaries), (D) any debt securities of the Company that are substantially similar to the Junior Subordinated Debentures (other than the Junior Subordinated Debentures issued to the Trust) or (E) any other securities which are convertible into, or exercisable or exchangeable for, any securities of the type referred to in clauses (A) through (D) above (subject, however, to the same exceptions, to the extent applicable, as are set forth in clauses (A) through (D) above) or (ii) enter into any swap or any other agreement or any transaction the transfers, directly or indirectly, the economic consequences of ownership of any of the securities described in clauses (A) through (D) above whether or not such swap is to be settled by delivery of such securities, in cash or otherwise. The Offerors consent to the entry by the Underwriter of stop-transfer orders with the Offeror's transfer agent if, in the Underwriter's sole discretion, a stop order is necessary to prevent violation of this subparagraph. The foregoing restrictions are expressly agreed to preclude the Offerors and the Bank from engaging in any hedging, pledge or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Registered Securities or any securities convertible into or exchangeable or exercisable for Registered Securities during the Lock-Up Period even if such securities would be disposed of by someone other than the Offerors or the Bank. Such prohibited hedging, pledge or other transactions would include without limitation any short sale (whether or not against the box), any pledge of shares covering an obligation that matures, or could reasonably mature during the Lock-Up Period, or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any Registered Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Securities. (k) The Offerors will file with the Commission such reports on Form SR as may be required pursuant to Rule 463 of the 1933 Act Regulations. SECTION 4. Payment of Expenses. Whether or not the transactions ------------------- contemplated hereunder are consummated or this Agreement remains effective or is terminated, the Offerors jointly and severally agree to pay all costs, fees and expenses incurred in connection with the performance of their obligations hereunder and in connection with the transactions contemplated hereby, including without limiting the generality of the foregoing, (i) all expenses incident to the issuance and delivery of the Securities (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Securities, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Securities, (iv) all fees and expenses of the Company's and the Trust's counsel and the Company's independent accountants, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, (vi) the fees and expenses of the Debenture Trustee, including the fees and disbursements of counsel for the Debenture Trustee, (vii) the fees and expenses of the Property Trustee, including the fees and disbursements of counsel for the Property Trustee, (viii) the fees and expenses of the Delaware Trustee, including the fees and disbursements of counsel for the Delaware Trustee, (ix) 14 the filing fees incident to the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of sale of the Securities, (x) the fees and expenses incurred in connection with the listing on the Nasdaq of the Securities and the shares of Common Stock issuable upon conversion of the Securities, (xi) the fees and expenses of any transfer agent, paying agent or registrar, and (xii) the cost of qualifying the Securities, and, if applicable, the Junior Subordinated Debentures, with The Depository Trust Company, (xiii) where applicable, all filing fees, attorney's fees and expenses incurred by the Offerors or the Underwriter in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Securities for offer and sale under the Blue Sky laws, (xiv) all the costs and expenses incurred by the Offerors in making road show presentations with respect to the Offering, (xv) all costs of preparing, printing and distributing bound volumes of the transaction documents for the Underwriter and its counsel, and (xvi) all other fees, costs and expenses referred to in Item 13 of the Registration Statement. Except as provided in this Section 5, and Section 8 hereof, the Underwriter shall pay all of its own expenses, including the fees and disbursements of its own counsel. SECTION 5. Conditions of Underwriter's Obligations. The obligations of --------------------------------------- the Underwriter hereunder are subject to the accuracy of the representations and warranties of the Offerors and the Bank herein contained, to the accuracy of the statements of the Company's or the Bank's officers or the Trustees, as the case may be, made in any certificate furnished pursuant to the provisions hereof, to the performance by each of the Offerors and the Bank of its obligations hereunder, and to the following further conditions: (a) The Registration Statement shall have become effective not later than 5:30 P.M. on the date hereof, or with the consent of the Underwriter, at a later time and date, not later, however, than 5:30 P.M. on the first business day following the date hereof, or at such later time and date as may be approved by a majority in interest of the Underwriter; and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated threatened or, to the knowledge of the Offerors and the Bank, contemplated by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriter. If the Offerors have elected to rely upon Rule 430A of the 1933 Act Regulations, the price of the Securities and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing in accordance with Rule 424(b) of the 1933 Act Regulations within the prescribed time period and prior to Closing Time the Offerors shall have provided evidence satisfactory to the Underwriter of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the 1933 Act Regulations. (b) At Closing Time the Underwriter shall have received: (i) The opinion, dated as of Closing Time, of Muldoon, Murphy & Faucette, counsel for the Offerors and the Bank, in form and substance satisfactory to counsel for the Underwriter, to the effect that: a. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. b. The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and to enter into and perform its obligations under the Operative Instruments, and to purchase, own and hold the Common Securities issued by the Trust. c. Each of the Company and its Subsidiaries (other than the Trust) is duly qualified as a foreign corporation to transact business and is in good standing in California and is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct 15 of business, except where the failure so to qualify or to be in good standing would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise; the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus; the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of such stock was issued in violation of the preemptive or other similar rights of any securityholder of the Company arising by operation of law, under the certificate of incorporation or by-laws of the Company, or to the best of their knowledge, under any agreement to which the Company is a party; and the Registered Securities, the Common Securities, the Common Guarantee, the Indenture, the Guarantee Agreements, the Company's charter and by-laws conform and will conform to all statements relating thereto contained in the Registration Statement and the Prospectus. d. The Bank is validly existing as a federal savings bank under the federal laws of the United States and Life Holdings has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware; each of the Subsidiaries has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; the Bank, as a federal savings bank, is not required to qualify as a foreign corporation or otherwise under state law; all of the issued and outstanding capital stock of Life Holdings has been duly authorized and validly issued and to the best of their knowledge is fully paid and non-assessable and is directly owned by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; to the best of their knowledge, all of the issued and outstanding capital stock of the Subsidiaries has been duly authorized and validly issued, is fully paid and non-assessable and is directly owned by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; to the best of their knowledge, none of the outstanding shares of capital stock of the Subsidiaries was issued in violation of the preemptive or similar rights of any stockholder of such corporation arising by operation of law, under the charter or by-laws of any subsidiary or under any agreement to which the Company or any of the Subsidiaries is a party. The only direct or indirect subsidiaries of the Company are the Trust, the Bank and Life Holdings. There are no subsidiaries of the Trust, the Bank or Life Holdings. To the best of their knowledge, except for the shares of capital stock of the Subsidiaries owned by the Company, the Company does not own any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity. e. The Company has corporate power and corporate authority to enter into and to perform its obligations under the Operative Instruments to which it is a party and to purchase, own and hold the Common Securities issued by the Trust. f. The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Act. g. Under the Delaware Act and the Declaration, the Trust has the power and authority (a) to enter into and perform its obligations under this Agreement, (b) to perform its obligations under the Declaration, (c) to issue and perform its obligations under the Securities and the Common Securities and (d) to purchase and hold the Junior Subordinated Debentures. h. The Trust is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is necessary, except where the failure to so qualify would not have a material adverse effect on the Trust; and, to the best knowledge of such counsel, the Trust is not a party to or otherwise bound by any agreements or instruments other than those described in the Prospectus. 16 i. The Declaration has been duly executed and delivered by the Company and the Declaration constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium, or other similar laws relating to or affecting creditors' rights generally and except as enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness. j. The Declaration has been duly authorized, executed and delivered by the Company and the Declaration constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally and except as enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness; and the Declaration has been duly qualified under the 1939 Act. k. The Common Securities have been duly authorized by the Declaration and, when duly issued and delivered by the Trust to the Company against payment of the consideration therefor as described in the Registration Statement, will be validly issued and, fully paid and non-assessable undivided beneficial interests in the assets of the Trust and will be owned of record by the Company; and the issuance of the Common Securities is not subject to preemptive or other similar rights arising under the Delaware Act or the Declaration. l. The Securities have been duly authorized by the Declaration and, when issued, delivered and paid for in accordance with the terms of this Agreement, will be validly issued, fully paid and non- assessable undivided beneficial interests in the assets of the Trust and will entitle the holders thereof to the benefits of the Declaration; the holders of the Securities will be entitled to the same limitation of personal liability as extended to stockholders of private corporations for profit organized under the DGCL; and the issuance of the Securities is not subject to preemptive or other similar rights arising under the Delaware Act or the Declaration. m. Each of the Guarantee Agreements has been duly authorized, executed and delivered by the Company and each of the Guarantee Agreements constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by the bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally and except as enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness; and the Guarantee Agreement has been duly qualified under the 1939 Act. n. The Indenture has been duly authorized, executed and delivered by the Company and (when duly authorized, executed and delivered by the Debenture Trustee) will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by the bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally and except as enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness; and the Indenture has been duly qualified under the 1939 Act. 17 o. The Junior Subordinated Debentures have been duly authorized by the Company and, when the Junior Subordinated Debentures have been duly executed by the Company and authenticated and delivered by the Debenture Trustee in the manner provided in the Indenture and paid for by the Trust of the consideration therefor, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including without limitation all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally and except as enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity), including concepts of commercial reasonableness, and will be entitled to the benefits of the Indenture; and the issuance of the Junior Subordinated Debentures is not subject to preemptive or other similar rights arising under the charter or by- laws of the Company, under the DGCL or, to the best knowledge of such counsel, otherwise. p. The shares of Common Stock issuable upon conversion of the Junior Subordinated Debentures have been duly authorized and reserved by the Company for issuance upon such conversion and, if and when issued upon such conversion in accordance with the provisions of the Indenture at conversion prices equal to or in excess of the par value of such shares of Common Stock at such time, will be validly issued, fully paid and non-assessable, and the issuance of such shares is not subject to preemptive or other similar rights arising under the charter or bylaws of the Company, under the DGCL or, to the best knowledge of such counsel, otherwise. q. To the best knowledge of such counsel, neither the Company nor any of the Subsidiaries is in violation of its Certificate of Incorporation, charter or Declaration, as the case may be, or by-laws or in default to an extent which, singly or in the aggregate, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise, in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which or any of them may be bound, or to which any of the property or assets of the Company or the Subsidiaries is subject, including without limitation, the Line of Credit Documents, the Reorganization Documents or the Securitization Documents. r. The execution, delivery and performance of this Agreement and the Operative Instruments, the consummation of the transactions contemplated herein and therein (including, without limitation, the issuance and sale of the Securities, Common Securities, Junior Subordinated Debentures and Guarantees and the issuance of shares of Common Stock upon conversion of the Securities and the Junior Subordinated Debentures) and compliance by each of the Company and the Trust with its respective obligations hereunder and thereunder have been duly authorized by all necessary corporate or other action and, to the best of their knowledge, do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event under, or result in the creation or imposition of any lien or encumbrance not existing on the date of this Agreement upon any property or assets of the Company or the Subsidiaries pursuant to, the Line of Credit Documents, the Reorganization Documents, the Securitization Documents, or any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or the Subsidiaries is subject and which breach or default singly or in the aggregate, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise; nor will any such action 18 result in any violation of the provisions of the certificate of incorporation, Declaration or the charter, as the case may be, or by- laws of the Company or the Subsidiaries or, to the best of such counsel's knowledge, any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or the Subsidiaries or any of their assets or properties and which violation, singly or in the aggregate, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise. s. The deposit accounts of the Bank are insured by the FDIC up to legally applicable limits, and, to their best knowledge, no proceedings for the termination or revocation of such insurance are pending or threatened. t. The activities of the Company and each of the Subsidiaries as described in the Registration Statement and the Prospectus are permissible activities for each such entity under federal law and the rules, regulations, resolutions and practices of the OTS and the FDIC. u. The Securities have been duly authorized for issuance and sale to the Underwriter pursuant to this Agreement and, when issued and delivered by the Trust pursuant to this Agreement against payment of the consideration set forth in the Pricing Agreement, will be validly issued and fully paid and non-assessable; the Registered Securities are not subject to preemptive or other similar rights arising by operation of law, under the certificate of incorporation or by-laws of the Company or, to the best of such counsel's knowledge, otherwise. v. Except as disclosed in or specifically contemplated by the Prospectus, to the best of such counsel's knowledge, there are no outstanding options, warrants or other rights calling for the issuance of, and no commitments, obligations, plans or arrangements to issue, any shares of capital stock of the Company or the Subsidiaries or any security convertible into or exchangeable for capital stock of the Company or the Subsidiaries. The outstanding stock options relating to the Company's Common Stock have been duly authorized and validly issued and the description thereof contained in the Prospectus is accurate in all material requests. w. The Registration Statement has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of their knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. x. The Registration Statement and the Prospectus and each amendment or supplement thereto, as of their respective effective or issue dates (other than the financial statements, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. y. The form of global certificate used to evidence the Securities complies in all material respects with all applicable statutory requirements, with any applicable requirements of the certificate of incorporation and by-laws of the Company and the requirements of Nasdaq. z. To the best of their knowledge, neither the Company nor any of the Subsidiaries is in violation of any directive from the FDIC, the OTS, or any other governmental authority, and the Company and the Subsidiaries are in compliance with all federal and state laws and regulations that regulate or relate to its business, including, without limitation, FIRREA, the FDIA, the NHA, FDICIA 19 and all other applicable laws and regulations where the failure to comply would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise. aa. To the best of their knowledge: there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any of the Subsidiaries is a party, or to which the property of the Company or any of the Subsidiaries is subject, before or brought by any court or governmental agency or body, which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the Operative Instruments or the performance by the Company of its obligations hereunder or thereunder or any of the other transactions contemplated by the Registration Statement which is required to be disclosed in such registration statements and are not accurately described therein; and the aggregate all pending legal or governmental proceedings to which the Company or any of the Subsidiaries is a party or that affect any of their respective properties that are not described in the Prospectus are not reasonably expected to result in a material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise. bb. The information in the Prospectus under "Risk Factors," "Description of Capital Stock of the Company," and "Regulation," and in the Registration Statement under items 14 and 15, to the extent that it constitutes matters of law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by them and complies in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations; to the best of such counsel's knowledge, there are no statutes or regulations, and no legal or governmental actions, suits or proceedings pending or threatened against the Company or any of the Subsidiaries that are required to be described in the Prospectus that are not described as required. cc. All descriptions in the Prospectus of contracts and other documents to which the Company or any of the Subsidiaries are a party comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations; to the best of their knowledge and information, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto and the descriptions thereof or references thereto comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. dd. No authorization, approval, consent or order of any court or governmental authority or agency (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which such counsel need express no opinion) is required in connection with the issuance and sale of the Securities by the Trust to the Underwriter pursuant to this Agreement, the issuance and sale of the Common Securities by the Trust to the Company, the issuance and sale of the Convertible Debentures by the Company to the Trust, the issuance by the Company of shares of Common Stock and rights upon conversion of the Convertible Debentures or the execution, delivery or performance by the Company or the Trust of their respective obligations under this Agreement, the Indenture, the Junior Subordinated Debentures, the Guarantee Agreements, the Declaration, the Securities or the Common Securities, except that such counsel need not express any opinion as to the rules and regulations of the NASD. 20 ee. The statements in the Prospectus under the captions "Description of Capital Securities," "Description of the Guarantee," "Description of the Junior Subordinated Debentures," "Relationship Among the Capital Securities, the Junior Subordinated Debentures and the Guarantee" and "Description of Capital Stock of the Company," insofar as such statements constitute a summary of certain provisions of law or certain provisions of the Securities, the Common Securities, the Junior Subordinated Debentures, the Guarantees, the Indenture, the Declaration, the Guarantee Agreements, the charter and by-laws of the Company or legal conclusions, have been reviewed by such counsel and are, in all material respects an accurate summary of such provisions and legal conclusions. ff. The Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation; accordingly, for United States federal income tax purposes, each holder of Securities generally will be considered the owner of an undivided interest in the Junior Subordinated Debentures. gg. The Junior Subordinated Debentures will be classified for United States federal income tax purposes as indebtedness of the Company. hh. The discussion set forth in the Prospectus under the caption "Certain Federal Income Tax Considerations" is a fair and accurate summary of the matters set forth therein, based upon current law and the assumptions stated therein; and the opinions of such counsel set forth under such caption are confirmed. ii. To the best of their knowledge, there are no persons with registration or other similar rights pursuant to written contracts with the Company or the Trust to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act other than the registration rights granted to purchasers in the Bank's private placement completed in the third quarter of 1996. jj. Neither the Company nor any of the Subsidiaries is, nor (assuming application by the Company of the net proceeds of the sale of the Securities in the manner described in the Prospectus) will become, as a result of the consummation of the transactions contemplated by the Agreement, required to register as an investment company under the Investment Company Act of 1940, as amended. In rendering their opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on the certificate of responsible officers of the Company, the Subsidiaries and public officials. Such counsel shall additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement (except for financial statements and schedules and other financial or statistical data included therein, as to which such counsel need make no statement), at the time each became effective or at the Representation Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (except for financial statements and schedules and other financial or statistical data included therein, as to which such counsel need make no statement), at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriter by the Offerors for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the date of such prospectus) or at Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 21 (ii) The favorable opinion of Bingham, Dana & Gould, counsel to the Debenture Trustee, Property Trustee and Guarantee Trustee, dated as of the Closing Time, in form and substance satisfactory to the Underwriter and counsel for the Underwriter, to the effect that: a. Each of the Debenture Trustee, Property Trustee and the Guarantee Trustee is a national banking association with trust powers, duly organized, validly existing and in good standing under the federal laws of the United States of America, with all necessary corporate power and authority to execute and deliver, and to carry out and perform its obligations under, the Indenture, the Declaration and the Guarantee Agreement. b. The Indenture, the Declaration and the Guarantee Agreement have been duly authorized, executed and delivered by the Debenture Trustee, the Property Trustee and the Guarantee Trustee, respectively, and constitute valid and binding obligations of the Debenture Trustee, the Property Trustee and the Guarantee Trustee, respectively, enforceable against the Debenture Trustee, the Property Trustee and the Guarantee Trustee, respectively, in accordance with their terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equity principles, including concepts of commercial reasonableness. c. The execution, delivery and performance of the Indenture, the Declaration and the Guarantee Agreement by the Debenture Trustee, the Property Trustee and the Guarantee Trustee, respectively, do not conflict with or constitute a breach of the charter or by-laws of the Debenture Trustee, the Property Trustee or the Guarantee Trustee, respectively. d. No consent, approval or authorization of, or registration with or notice to, any federal banking authority is required for the execution, delivery or performance by the Debenture Trustee, the Property Trustee or the Guarantee Trustee of the Indenture, the Declaration or the Guarantee Agreement, respectively. e. The Debenture Trustee, the Property Trustee and the Guarantee Trustee have each been duly qualified under the 1939 Act to serve in such capacities in connection with the Indenture, the Declaration, the Guarantee Agreement and have properly completed and filed under the 1939 Act a Form T-1 in connection therewith. (iii) The favorable opinion of Prickett, Jones, Elliott, Kristol & Schner, counsel to the Delaware Trustee, dated as of the Closing Time, in form and substance satisfactory to the Underwriter and counsel for the Underwriter, to the effect that: a. The Delaware Trustee is a Delaware banking corporation with trust powers, validly existing and in good standing under the laws of the State of Delaware, with all necessary power and authority to execute and deliver, and to carry out and perform its obligations under, the Declaration. b. The Declaration has been duly authorized, executed and delivered by the Delaware Trustee, and constitutes a valid and binding obligations of the Delaware Trustee, enforceable against the Delaware Trustee in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equity principles, including concepts of commercial reasonableness. c. The execution, delivery and performance of the Declaration by the Delaware Trustee do not conflict with or constitute a breach of the charter or by-laws of the Delaware Trustee. 22 d. No consent, approval or authorization of, or registration with or notice to, any federal or Delaware banking authority is required for the execution, delivery or performance by the Delaware Trustee of the Declaration. (iv) The opinion of Brobeck, Phleger & Harrison LLP, counsel for the Underwriter, with respect to the issuance and sale of the Securities, the Registration Statement and Prospectus, and such other related matters as the Underwriter may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (c) At Closing Time there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Underwriter shall have received a certificate of the President and the chief financial or chief accounting officer or Trustee of the Company, the Bank and the Trust, each dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1 hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company, the Bank and the Trust have complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened by the Commission. As used in this Section 5(c) the term "Prospectus" means the Prospectus in the form first used by the Underwriter to confirm sales of the Securities. (d) At the time of the execution of this Agreement, the Underwriter shall have received from each of Grant Thornton LLP, Price Waterhouse LLP and Deloitte & Touche LLP a letter dated such date, in form and substance satisfactory to the Underwriter, to the effect that (i) they are independent public accountants with respect to the Company and the Trust within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; and (ii) in their opinion, the consolidated financial statements audited by them and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the related published rules and regulations. The letter from Deloitte & Touche LLP shall additionally state that based upon limited procedures set forth in detail in such letter (which shall include, without limitation, the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in SAS No. 71, Interim Financial Information, with respect to the unaudited condensed financial statement of the Bank included in the Registration Statement), nothing has come to their attention which causes them to believe that (A) any material modifications should be made to the unaudited condensed financial statements included in the Registration Statement for them to be in conformity with generally accepted accounting principles or (B) the unaudited condensed consolidated financial statements included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the related published rules and regulations or (C) at a specified date not more than four days prior to the date of this Agreement, there has been any change in the capital stock of the Bank, any increase in the debt of the Bank or any decrease in the level of total assets and deposits at the Bank as compared with the amounts shown in the September 30, 1997 balance sheet included in the Registration Statement or, during the period from October 1, 1997 to November 30, 1997, there were any decreases as compared with the corresponding period in the preceding year, in net interest income (before and after allowance for estimated loan losses), net interest income and net income of the Bank, except in all instances for changes, increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur. The letter of each of the three auditors referred to above shall also state that in addition to the examination referred to in their opinions (and, in the case of Deloitte & Touche LLP only, the limited procedures referred to in clause (iii) above), they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information which are included in the Registration Statement and Prospectus and which are specified by the Underwriter, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Company and the Bank identified in such letter; and, they have compared the information in the 23 Prospectus under selected captions with the disclosure requirements of Regulation S-K and on the basis of limited procedures specified in their letters nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of Regulation S-K. (e) At the Closing Time the Underwriter shall have received from Grant Thornton LLP, Price Waterhouse LLP and Deloitte & Touche LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (d) of this Section. If the Offerors have elected to rely on Rule 430A of the 1933 Act Regulations, the letter of Deloitte & Touche LLP shall additionally state that they have carried out procedures as specified in the last sentence of subsection (d) of this Section with respect to certain amounts, percentages and financial information specified by the Underwriter and deemed to be a part of the Registration Statement pursuant to Rule 430(A)(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such sentence. (f) At the Closing Time the Securities and the shares of Common Stock issuable upon conversion of the Securities shall have been approved for inclusion in the Nasdaq National Market System, subject only to official notice of issuance, and the NASD shall have approved in writing the Underwriter's participation in the distribution of the Securities and such approval shall not have been withdrawn or limited. (g) At the date of this Agreement, the Underwriter shall have received an agreement substantially in the form of Exhibit B hereto signed by each of the --------- directors and officers of the Company and the Bank. The Company and the Bank jointly and severally represent and warrant that Schedule A hereto includes a ---------- complete and accurate list of all directors and officers of the Company and the Bank. (h) At the Closing Time and at each Date of Delivery, counsel for the Underwriter shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities, Common Securities and Junior Subordinated Debentures as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and the Trust in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Underwriter and counsel for the Underwriter. (i) In the event that the Underwriter exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Offerors and the Bank contained herein and the statements in any certificate furnished by the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Underwriter shall have received: (i) A certificate, dated such Date of Delivery, of the President and of the chief financial or chief accounting officer of the Company and the Bank, and of the Trustee of the Trust, confirming that the certificate delivered at the Closing Time pursuant to Section 5(c) hereof remains true and correct as of such Date of Delivery. (ii) The opinion of Muldoon, Murphy & Faucette, counsel for the Company, in form and substance satisfactory to counsel for the Underwriter, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b)(1) hereof. (iii) The favorable opinion of Bingham, Dana & Gould, counsel for the Property Trustee and the Guarantee Trustee, in form and substance satisfactory to the Underwriters, dated such Date of Delivery, to the same effect as the opinion required by Section 5(b)(2). 24 (iv) The favorable opinion of Prickett, Jones, Elliott, Kristol & Schner, counsel for the Delaware Trustee, in form and substance satisfactory to the Underwriters, dated such Date of Delivery, to the same effect as the opinion required by Section 5(b)(3) hereof. (v) The opinion of Brobeck, Phleger & Harrison LLP, counsel for the Underwriter, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b)(4) hereof. (vi) A letter from each of Grant Thornton LLP, Price Waterhouse LLP and Deloitte & Touche LLP, in form and substance satisfactory to the Underwriter and dated such Date of Delivery, substantially the same in form and substance as the letter furnished to the Underwriter pursuant to Section 5(e) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than four days prior to such Date of Delivery. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Underwriter by notice to the Company at any time at or prior to Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 6 and 7 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) The Offerors and the Bank agree jointly and severally to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any untrue statement or alleged untrue statement made by the Offerors and the Bank in Section 2(a) of this Agreement. (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be part of the Registration Statement pursuant to Rule 430A(b) of the 1933 Act Regulations, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or prospectus, including the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (iii) against any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials prepared by the Offerors or the Bank or authorized for use by the Offerors or the Bank to be used in connection with the marketing of the Securities, including without limitation, slides, videos, films, tape recordings. (iv) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company. (v) against any and all expense whatsoever, as incurred (including, subject to the third sentence of Section 6(c) hereof, the fees and disbursements of counsel chosen by the Underwriter), reasonably incurred 25 in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above. provided, however, that this indemnity agreement shall not apply to any loss, - -------- ------- liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Offerors or the Bank by the Underwriter expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). The foregoing indemnification with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Securities, or any person controlling the Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Underwriter to such person, if such is required by law, at or prior to the written confirmation of the sale of such shares to such person and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (b) The Underwriter agrees to indemnify and hold harmless each of the Offerors and the Bank, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Offerors and the Bank within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Offerors and the Bank by the Underwriter expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not -------- ------- (except with the consent of the indemnified party) be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered 26 into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. SECTION 7. Contribution. If the indemnification provided for in Section 6 ------------ hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Offerors on the one hand and the Underwriter on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Offerors on the one hand and of the Underwriter on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Offerors on the one hand and the Underwriter on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Offerors and the total underwriting discount received by the Underwriter, in each case as set forth on the cover of the Prospectus, bear to the aggregate initial public offering price of the Securities as set forth on such cover. The relative fault of the Offerors on the one hand and the Underwriter on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Offerors or by the Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Offerors and the Underwriter agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriter were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, each Trustee of the Trust and each person, if any, who controls an Offeror within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Offeror. The Underwriter' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Agreement and the Pricing Agreement, or contained in certificates of officers of the Company or the Bank, or Trustees of the Trust, submitted pursuant hereto, are made only as of the date hereof and the Representation Date and the Closing Date, as the case may be, but shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Underwriter or controlling person, or by or on behalf of Offerors or the Bank, and shall survive delivery of the Securities to the Underwriter. 27 SECTION 9. Termination of Agreement. ------------------------ (a) The Underwriter may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and the Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or elsewhere, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Underwriter, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in the Common Stock has been suspended or limited by the Commission or Nasdaq, or if trading generally on the American Stock Reorganization or the New York Stock Reorganization or in the over-the-counter market has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal, New York or California authorities. As used in this Section 9(a), the term "Prospectus" means the Prospectus in the form first used by the Underwriter to confirm sales of the Securities. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 6 and 7 shall survive such termination and remain in full force and effect. SECTION 10. Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriter shall be directed to Keefe, Bruyette & Woods, Inc., Two World Trade Center, New York, New York 10048, attention of William Houlihan; notices to the Offerors shall be directed to them at Life Financial Corporation, 10540 North Magnolia Avenue, Unit B, Riverside, California 92505, attention of Daniel L. Perl. SECTION 11. Parties. This Agreement and the Pricing Agreement shall each ------- inure to the benefit of and be binding upon the Underwriter, the Offerors, the Bank and their respective successors. Nothing expressed or mentioned in this Agreement or the Pricing Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers, trustees and directors referred to in Sections 6 and 7 and their heirs and legal representative, any legal or equitable right, remedy or claim under or in respect of this Agreement or the Pricing Agreement or any provision herein or therein contained. This Agreement and the Pricing Agreement and all conditions and provisions hereof and thereof are intended to be for the sole and exclusive benefit of the parties hereto and their respective successors, and said controlling persons and officers, trustees and directors and their heirs and legal representative, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT AND THE PRICING ---------------------- AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. 28 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriter, on the one hand, and the Company and the Trust, on the other, in accordance with its terms. Very truly yours, LIFE FINANCIAL CORPORATION By:___________________________________ Daniel L. Perl, President and Chief Executive Officer LIFE BANK By:___________________________________ Daniel L. Perl, President and Chief Executive Officer LIFE FINANCIAL CAPITAL TRUST By: Life Financial Corporation, as Sponsor By:___________________________________ Daniel L. Perl, President and Chief Executive Officer CONFIRMED AND ACCEPTED, as of the date first above written: KEEFE, BRUYETTE & WOODS, INC. By:______________________________________ Name:__________________________________ Title:_________________________________ 29 SCHEDULE A LIST OF PERSONS SUBJECT TO SECTION 5(g) OF THE UNDERWRITING AGREEMENT WHO ARE REQUIRED TO DELIVER A LETTER SUBSTANTIALLY IN THE FORM OF EXHIBIT B TO THE UNDERWRITING AGREEMENT [to be attached] Exhibit A ____________ Capital Securities LIFE FINANCIAL CAPITAL TRUST __% CONVERTIBLE TRUST PREFERRED SECURITIES (Liquidation Amount $________ per Capital Security) PRICING AGREEMENT ----------------- December __, 1997 KEEFE, BRUYETTE & WOODS, INC. Two World Trade Center New York, New York 10048 Dear Sirs and Mesdames: Reference is made to the Underwriting Agreement dated December __, 1997 (the "Underwriting Agreement") relating to the purchase by Keefe, Bruyette & ---------------------- Woods, Inc. (the "Underwriter"), of the above-described Convertible Trust ----------- Preferred Securities (the "Securities"), of Life Financial Capital Trust, a ---------- statutory business trust created under the Business Trust Act (Chapter 38, Title 12 of the Delaware Code, 12 Del. C. Section 3801 et seq.) (the "Trust"). ----- Pursuant to Section 2 of the Underwriting Agreement, the Company and the Trust agree with the Underwriter that the initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $_____. 1 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE. If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriter, on the one hand, and the Company and the Trust, on the other, in accordance with its terms. Very truly yours, LIFE FINANCIAL CORPORATION By:________________________________________ Daniel L. Perl, President and Chief Executive Officer LIFE FINANCIAL CAPITAL TRUST By: Life Financial Corporation, as Sponsor By:____________________________________ Daniel L. Perl, President and Chief Executive Officer CONFIRMED AND ACCEPTED, as of the date first above written: KEEFE, BRUYETTE & WOODS, INC. By:______________________________________ Name:__________________________________ Title:_________________________________ 2 EX-4.0 3 CERTIFICATE OF TRUST LIFE FINANCIAL CAPITAL TRUST EXHIBIT 4.O CERTIFICATE OF TRUST OF LIFE FINANCIAL CAPITAL TRUST ---------------------------- The undersigned Trustees of LIFE Financial Capital Trust (the "Trust"), pursuant to the Delaware Business Trust Act (12 Del.C. (S)3801, et seq.), ------ ------ HEREBY CERTIFY: 1. Name. The name of the business trust formed hereby is LIFE Financial ---- Capital Trust. 2. Delaware Trustee. The name and business address of the Delaware Trustee ---------------- of the Trust in the State of Delaware is Delaware Trust Capital Management, Inc., 900 Market Street, 2nd Floor, Wilmington, New Castle County, Delaware, 19801. Attn: Corporate Trust Administration. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the Trust, have executed this Certificate of Trust as of the 2nd day of December, 1997. DELAWARE TRUSTEE: Delaware Trust Capital Management, Inc. By: /s/ RICHARD N. SMITH -------------------------- Name: Richard N. Smith Title: Vice President INITIAL TRUSTEE: /s/ L. BRUCE MILLS, JR. ------------------------- Name: L. Bruce Mills, Jr. 2 EX-4.1 4 FORM OF AMENDED & RESTATED DECLARATION OF TRUST EXHIBIT 4.1 ==================================================================== AMENDED AND RESTATED DECLARATION OF TRUST LIFE FINANCIAL CAPITAL TRUST DATED AS OF ________________, 1997 ==================================================================== TABLE OF CONTENTS
Page ARTICLE I - INTERPRETATION AND DEFINITIONS........................................................................1 SECTION 1.1. Definitions...................................................................................1 ----------- ARTICLE II - TRUST INDENTURE ACT..................................................................................8 SECTION 2.1. Trust Indenture Act; Application..............................................................8 ----------- SECTION 2.2. Lists of Holders of Securities................................................................8 ----------- SECTION 2.3. Reports by the Property Trustee...............................................................9 ----------- SECTION 2.4. Periodic Reports to Property Trustee..........................................................9 ----------- SECTION 2.5. Evidence of Compliance with Conditions Precedent..............................................9 ----------- SECTION 2.6. Events of Default; Waiver.....................................................................9 ----------- SECTION 2.7. Event of Default; Notice.....................................................................11 ----------- ARTICLE III - ORGANIZATION.......................................................................................12 SECTION 3.1. Name.........................................................................................12 ----------- SECTION 3.2. Office.......................................................................................12 ----------- SECTION 3.3. Purpose......................................................................................12 ----------- SECTION 3.4. Authority....................................................................................12 ----------- SECTION 3.5. Title to Property of the Trust...............................................................13 ---------- SECTION 3.6. Powers and Duties of the Administrators......................................................13 ----------- SECTION 3.7. Prohibition of Actions by the Trust, the Trustees and the Administrators.....................16 ----------- SECTION 3.8. Powers and Duties of the Property Trustee....................................................17 ----------- SECTION 3.9. Certain Additional Duties and Responsibilities of the Property Trustee.......................19 ----------- SECTION 3.10. Certain Rights of the Property Trustee.......................................................21 ------------ SECTION 3.11. Delaware Trustee.............................................................................23 ------------ SECTION 3.12. Not Responsible for Recitals or Issuance of Securities.......................................23 ------------ SECTION 3.13. Duration of Trust............................................................................23 ------------ SECTION 3.14. Mergers......................................................................................23 ------------ ARTICLE IV - SPONSOR.............................................................................................25 SECTION 4.1. Sponsor's Purchase of Common Securities......................................................25 ----------- SECTION 4.2. Responsibilities of the Sponsor..............................................................25 ----------- SECTION 4.3. Right to Proceed.............................................................................25 ----------- ARTICLE V - TRUSTEES AND ADMINISTRATORS..........................................................................26 SECTION 5.1. Number of Trustees and Administrators; Appointment of Co-Trustee.............................26 ----------- SECTION 5.2. Delaware Trustee.............................................................................26 ----------- SECTION 5.3. Property Trustee; Eligibility................................................................27 ----------- SECTION 5.4. Certain Qualifications of Administrators and Delaware Trustee Generally......................28 -----------
i SECTION 5.5. Administrators...............................................................................28 ----------- SECTION 5.6. Appointment, Removal and Resignation of Trustees and Administrators..........................28 ----------- SECTION 5.7. Vacancies Among Trustees and Administrators..................................................30 ----------- SECTION 5.8. Effect of Vacancies..........................................................................30 ----------- SECTION 5.9. Meetings.....................................................................................30 ----------- SECTION 5.10. Delegation of Power..........................................................................31 ------------ SECTION 5.11. Merger, Conversion, Consolidation or Succession to Business..................................31 ------------ ARTICLE VI - DISTRIBUTIONS.......................................................................................31 SECTION 6.1. Distributions................................................................................31 ----------- ARTICLE VII - ISSUANCE OF SECURITIES.............................................................................32 SECTION 7.1. General Provisions Regarding Securities......................................................32 ----------- SECTION 7.2. Execution and Authentication.................................................................32 ----------- SECTION 7.3. Form and Dating..............................................................................33 ----------- SECTION 7.4. Definitive Capital Securities................................................................34 ----------- SECTION 7.5. Registrar, Paying Agent and Conversion Agent.................................................35 ----------- SECTION 7.6. Paying Agent to Hold Money in Trust..........................................................35 ----------- SECTION 7.7. Replacement Securities.......................................................................36 ----------- SECTION 7.8. Outstanding Capital Securities...............................................................36 ----------- SECTION 7.9. Capital Securities in Treasury...............................................................36 ----------- SECTION 7.10. Temporary Securities.........................................................................37 ------------ SECTION 7.11. Cancellation.................................................................................37 ------------ SECTION 7.12. CUSIP........................................................................................37 ------------ ARTICLE VIII - DISSOLUTION AND TERMINATION OF TRUST..............................................................37 SECTION 8.1. Dissolution and Termination of Trust.........................................................37 ----------- ARTICLE IX - TRANSFER OF INTERESTS...............................................................................38 SECTION 9.1. Transfer of Securities.......................................................................38 ----------- SECTION 9.2. Transfer Procedures and Restrictions.........................................................39 ----------- SECTION 9.3. Book Entry Interests.........................................................................42 ----------- SECTION 9.4. Notices to Clearing Agency...................................................................43 ----------- SECTION 9.5. Appointment of Successor Clearing Agency.....................................................43 ----------- ARTICLE X - LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS.................................43 SECTION 10.1. Liability....................................................................................43 ------------ SECTION 10.2. Exculpation..................................................................................44 ------------ SECTION 10.3. Fiduciary Duty...............................................................................44 ------------ SECTION 10.4. Indemnification..............................................................................45 ------------ SECTION 10.5. Outside Businesses...........................................................................48 ------------ SECTION 10.6. Compensation; Fees...........................................................................48 ------------
ii ARTICLE XI - ACCOUNTING..........................................................................................49 SECTION 11.1. Fiscal Year..................................................................................49 ------------ SECTION 11.2. Certain Accounting Matters...................................................................49 ------------ SECTION 11.3. Banking......................................................................................49 ------------ SECTION 11.4. Withholding..................................................................................50 ------------ ARTICLE XII - AMENDMENTS AND MEETINGS............................................................................50 SECTION 12.1. Amendments...................................................................................50 ------------ SECTION 12.2. Meetings of the Holders; Action by Written Consent...........................................52 ------------ ARTICLE XIII - REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE..........................................54 SECTION 13.1. Representations and Warranties of Property Trustee...........................................54 ------------ SECTION 13.2. Representations and Warranties of Delaware Trustee...........................................54 ------------ ARTICLE XIV - MISCELLANEOUS......................................................................................55 SECTION 14.1. Notices......................................................................................55 ------------ SECTION 14.2. Governing Law................................................................................56 ------------ SECTION 14.3. Intention of the Parties.....................................................................57 ------------ SECTION 14.4. Headings.....................................................................................57 ------------ SECTION 14.5. Successors and Assigns.......................................................................57 ------------ SECTION 14.6. Partial Enforceability.......................................................................57 ------------ SECTION 14.7. Counterparts.................................................................................57 ------------
iii AMENDED AND RESTATED DECLARATION OF TRUST OF LIFE FINANCIAL CAPITAL TRUST _____________________, 1997 DECLARATION OF TRUST ("Declaration") dated and effective as of _______________, 1997, by the Trustees (as defined herein), the Administrators (as defined herein), the Sponsor (as defined herein) and by the holders, from time to time, of undivided beneficial interests in the assets of the Trust (as defined herein) to be issued pursuant to this Declaration; WHEREAS, the Delaware Trustee, the Property Trustee, the Initial Trustee and the Sponsor established LIFE Financial Capital Trust (the "Trust"), a trust created under the Business Trust Act (as defined herein) pursuant to a Declaration of Trust dated as of ___________, 1997 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on ________________, 1997, for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in certain Debentures of the Debenture Issuer (each as hereinafter defined); WHEREAS, all of the trustees of the Trust, the Administrators and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration; and NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a business trust under the Business Trust Act and that this Declaration constitute the governing instrument of such business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration. ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1. Definitions. ----------- Unless the context otherwise requires: (a) Capitalized terms used in this Declaration but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Declaration as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Declaration unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Administrator" has the meaning set forth in Section 5.1. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Agent" means any Paying Agent, Registrar or Conversion Agent. "Authorized Officer" of a Person means any other Person that is authorized to legally bind such former Person. "Book Entry Interest" means a beneficial interest in a Global Certificate registered in the name of a Clearing Agency or its nominee, ownership and transfers of which shall be maintained and made through book entries by a Clearing Agency as described in Sections 9.2 and 9.3. "Business Day" means any day other than a Saturday or a Sunday or a day on which banking institutions in California or Massachusetts are authorized or required by law or executive order to close. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. Section 3801 et seq., as it may be amended from time to time, or any successor legislation. "Capital Security Beneficial Owner" means, with respect to a Book Entry Interest, a Person who is the beneficial owner of such Book Entry Interest, as reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing Agency (directly as a Clearing Agency Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). "Capital Securities" has the meaning specified in Section 7.1(a). "Capital Securities Guarantee" means the Capital Securities Guarantee Agreement, dated as of ___________________, 1997, by the Sponsor as guarantor, the Trust and State Street Bank and Trust Company, as Capital Securities Guarantee Trustee, with respect to the Capital Securities. "Clearing Agency" means an organization registered as a "Clearing Agency" pursuant to Section 17A of the Exchange Act that is acting as depositary for the Capital Securities and in whose 2 name or in the name of a nominee of that organization shall be registered a Global Certificate and which shall undertake to effect book entry transfers and pledges of the Capital Securities. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Clearing Agency effects book entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Time" means either the time of the closing of the Public Offering or the time of the closing of the Underwriter's overallotment option with respect to the Public Offering, as the case may be. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the United States Securities and Exchange Commission as from time to time constituted, or if any time after the execution of this Declaration such Commission is not existing and performing the duties now assigned to it under applicable Federal securities laws, then the body performing such duties at such time. "Common Securities" has the meaning specified in Section 7.1(a). "Common Securities Guarantee" means the Common Securities Guarantee Agreement, dated as of _________________, 1997, by the Sponsor as guarantor, with respect to the Common Securities. "Common Securities Subscription Agreement" means the subscription agreement dated as of ___________________, 1997 between the Trust and the Sponsor relating to the Common Securities representing undivided beneficial interests in the assets of the Trust. "Common Stock" means the common stock, $0.01 par value per share, of the Sponsor. "Company Indemnified Person" means (a) any Administrator; (b) any Affiliate of any Administrator; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrator; or (d) any officer, employee or agent of the Trust or its Affiliates. "Conversion Agent" has the meaning specified in Section 7.5. "Corporate Trust Office" means the office of the Property Trustee at which the corporate trust business of the Property Trustee, at any particular time, shall be principally administered, which office at the date of execution of this Declaration is located at Two International Place, Boston, Massachusetts 02110. 3 "Covered Person" means (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates and (b) any Holder of Securities. "Debenture Issuer" means LIFE Financial Corporation, a Delaware corporation, or any successor entity resulting from any consolidation, amalgamation, merger or other business combination, in its capacity as issuer of the Debentures under the Indenture. "Debenture Subscription Agreement" means the Subscription Agreement dated as of ____________________, 1997 between the Sponsor and the Trust relating to the Debentures issuable pursuant to the Indenture. "Debenture Trustee" means State Street Bank and Trust Company, a Massachusetts banking corporation, as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Debentures" means the ____% Junior Convertible Subordinated Debentures due _____________, 2027 of the Debenture Issuer issued pursuant to the Indenture. "Default" means an event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Definitive Capital Securities" shall have the meaning set forth in Section 7.4. "Delaware Trustee" has the meaning set forth in Section 5.2. "Direct Action" shall have the meaning set forth in Section 3.8(e). "Distribution" means a distribution payable to Holders in accordance with Section 6.1. "DTC" means The Depository Trust Company, the initial Clearing Agency. "Event of Default" in respect of the Securities means an Event of Default (as defined in the Indenture) that has occurred and is continuing in respect of the Debentures. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Fiduciary Indemnified Person" has the meaning set forth in Section 10.4(b). "Global Capital Security" has the meaning set forth in Section 7.3(a). "Holder" means a Person in whose name a Security is registered, such Person being a beneficial owner within the meaning of the Business Trust Act. 4 "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the Indenture, dated as of ____________________, 1997, between the Debenture Issuer and State Street Bank and Trust Company, as amended from time to time. "Initial Trustee" shall mean _________________, not in his individual capacity but solely in his capacity as initial trustee of the Trust. "Investment Company" means an investment company as defined in the Investment Company Act. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Legal Action" has the meaning set forth in Section 3.6(g). "Majority in liquidation amount" means, with respect to the Trust Securities, except as provided in the terms of the Capital Securities or by the Trust Indenture Act, Holder(s) of outstanding Trust Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Officer's Certificate" means, with respect to any Person, a certificate signed by the Chairman, the Co-Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President, the Comptroller, the Secretary or an Assistant Secretary of such Person. Any Officer's Certificate delivered with respect to compliance with a condition or covenant provided for in this Declaration shall include: (a) a statement that the officer signing the Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by such officer in rendering the Certificate; (c) a statement that such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of such officer, such condition or covenant has been complied with. 5 "Opinion of Counsel" shall mean a written opinion of counsel, who may be an employee of the Sponsor, and who shall be acceptable to the Property Trustee. "Paying Agent" has the meaning specified in Section 7.5. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Property Trustee" has the meaning set forth in Section 5.3(a). "Property Trustee Account" has the meaning set forth in Section 3.8(c). "Prospectus" has the meaning set forth in Section 4.2(a). "Public Offering" means the offering of all Capital Securities in a firm commitment public offering. "Quorum" means a majority of the Administrators or, if there are only two Administrators, both of them. "Registrar" has the meaning set forth in Section 7.5. "Registration Statement" means the Registration Statement on Form S-1, including any amendments thereto, relating to, among other securities, the Capital Securities. "Related Party" means, with respect to the Sponsor, any direct or indirect wholly owned subsidiary of the Sponsor or any other Person that owns, directly or indirectly, 100% of the outstanding voting securities of the Sponsor. "Responsible Officer" means, with respect to the Property Trustee, any officer within the Corporate Trust Office of the Property Trustee, including any vice president, any assistant vice president, any assistant secretary, any assistant treasurer, any trust officer, any senior trust officer or other officer of the Corporate Trust Office of the Property Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Securities" or "Trust Securities" means the Common Securities and the Capital Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. 6 "Securities Guarantees" means the Common Securities Guarantee and the Capital Securities Guarantee. "Special Event" has the meaning set forth in Annex I hereto. "Sponsor" means LIFE Financial Corporation, a Delaware corporation, or any successor entity resulting from any merger, consolidation, amalgamation or other business combination, in its capacity as sponsor of the Trust. "Super Majority" has the meaning set forth in Section 2.6(a)(ii). "10% in liquidation amount" means, with respect to the Trust Securities, except as provided in the terms of the Capital Securities or by the Trust Indenture Act, Holder(s) of outstanding Trust Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% or more of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue in office in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Underwriting Agreement" means the Underwriting Agreement among the Sponsor, the Trust and Keefe, Bruyette & Woods, Inc., as underwriter, in connection with the Public Offering of the Capital Securities. 7 ARTICLE II TRUST INDENTURE ACT SECTION 2.1. Trust Indenture Act; Application. ----------- (a) This Declaration is subject to the provisions of the Trust Indenture Act that are required to be part of this Declaration and, to the extent applicable, shall be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a Trustee for the purposes of the Trust Indenture Act. (c) If and to the extent that any provision of this Declaration limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (d) The application of the Trust Indenture Act to this Declaration shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. SECTION 2.2. Lists of Holders of Securities. ----------- (a) Each of the Sponsor and the Administrators on behalf of the Trust shall provide the Property Trustee, unless the Property Trustee is Registrar for the Securities (i) within 14 days after each record date for payment of Distributions, a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Holders ("List of Holders") as of such record date, provided that neither the Sponsor nor the Administrators on behalf of the Trust shall be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Property Trustee by the Sponsor and the Administrators on behalf of the Trust, and (ii) at any other time, within 30 days of receipt by the Trust of a written request for a List of Holders by a Holder for a purpose reasonably related to the Holder's interest as a Holder, as of a date no more than 14 days before such List of Holders is given to the Property Trustee. The determination of what constitutes a purpose reasonably related to the Holder's interest as a Holder shall be in the sole discretion of the Administrators. The Property Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in Lists of Holders given to it or which it receives in the capacity as Paying Agent (if acting in such capacity), provided that the Property Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Property Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. 8 SECTION 2.3. Reports by the Property Trustee. ----------- Within 60 days after May 15 of each year, commencing May 15, 1998, the Property Trustee shall provide to the Holders of the Capital Securities such reports as are required by Section 313(a) of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Property Trustee shall also comply with the other requirements of Section 313 of the Trust Indenture Act. The Sponsor shall promptly notify the Property Trustee if and when the Capital Securities are listed on any stock exchange. SECTION 2.4. Periodic Reports to Property Trustee. ----------- Each of the Sponsor and the Administrators on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as are required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314(a)(4) of the Trust Indenture Act, such compliance certificate to be delivered annually on or before 120 days after the end of each fiscal year of the Sponsor; provided, that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Property Trustee within 15 days after the same is required to be filed with the Commission. Delivery of such reports, information and documents to the Property Trustee is for informational purposes only and the Property Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Trust's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officer's Certificates). SECTION 2.5. Evidence of Compliance with Conditions Precedent. ----------- Each of the Sponsor and the Administrators on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent provided for in this Declaration that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c) (1) of the Trust Indenture Act may be given in the form of an Officer's Certificate. SECTION 2.6. Events of Default; Waiver. ----------- (a) The Holders of a Majority in liquidation amount of Capital Securities may, by vote, on behalf of the Holders of all of the Capital Securities, waive any past Event of Default in respect of the Capital Securities and its consequences, provided that, if the underlying Event of Default under the Indenture: (i) is not waivable under the Indenture, the Event of Default under the Declaration shall also not be waivable; or 9 (ii) requires the consent or vote of greater than a majority in aggregate principal amount of the holders of the Debentures (a "Super Majority") to be waived under the Indenture, the Event of Default under the Declaration may only be waived by the vote of the Holders of at least the proportion in aggregate liquidation amount of the Capital Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. The foregoing provisions of this Section 2.6(a) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Upon such waiver, any such default shall cease to exist, and any Event of Default with respect to the Capital Securities arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other default or an Event of Default with respect to the Capital Securities or impair any right consequent thereon. Any waiver by the Holders of the Capital Securities of an Event of Default with respect to the Capital Securities shall also be deemed to constitute a waiver by the Holders of the Common Securities of any such Event of Default with respect to the Common Securities for all purposes of this Declaration without any further act, vote or consent of the Holders of the Common Securities. The Holders of a Majority in liquidation amount of the Capital Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee or to direct the exercise of any trust or power conferred upon the Property Trustee, including the right to direct the Property Trustee to exercise the remedies available to it as a holder of the Debentures; provided, however, that (subject to the provisions of Section 3.9) the Property Trustee shall have the right to decline to follow any such direction if the Property Trustee, upon the advice of counsel, shall determine that the action so directed would be unjustly prejudicial to the Holders not taking part in such direction or if the Property Trustee, upon the advice of counsel, determines that the action or proceeding so directed may not lawfully be taken or if the Property Trustee, in good faith, by its board of directors or trustees, executive committee, or a trust committee of directors or trustees, and/or Responsible Officers, shall determine that the action or proceeding so directed would involve the Property Trustee in personal liability. (b) The Holders of a Majority in liquidation amount of the Common Securities may, by vote, on behalf of the Holders of all of the Common Securities, waive any past Event of Default with respect to the Common Securities and its consequences, provided that, if the underlying Event of Default under the Indenture: (i) is not waivable under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below in this Section 2.6(b), the Event of Default under the Declaration shall also not be waivable; or (ii) requires the consent or vote of a Super Majority to be waived, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below in this Section 2.6(b), the Event of Default under the 10 Declaration may only be waived by the vote of the Holders of at least the proportion in aggregate liquidation amount of the Common Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding; provided further, each Holder of Common Securities will be deemed to have waived any such Event of Default and all Events of Default with respect to the Common Securities and its consequences if all Events of Default with respect to the Capital Securities have been cured, waived or otherwise eliminated, and until such Events of Default have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the Holders of the Capital Securities and only the Holders of the Capital Securities will have the right to direct the Property Trustee in accordance with the terms of the Securities. The foregoing provisions of this Section 2.6(b) shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Subject to the foregoing provisions of this Section 2.6(b), upon such waiver, any such default shall cease to exist and any Event of Default with respect to the Common Securities arising therefrom shall be deemed to have been cured for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other default or Event of Default with respect to the Common Securities or impair any right consequent thereon. (c) A waiver of an Event of Default under the Indenture by the Property Trustee, at the direction of the Holders of the Capital Securities, constitutes a waiver of the corresponding Event of Default under this Declaration. The foregoing provisions of this Section 2.6(c) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. SECTION 2.7. Event of Default; Notice. ----------- (a) The Property Trustee, within 90 days after the occurrence of an Event of Default, shall transmit by mail, first class postage prepaid, to the Holders notice of all defaults with respect to the Securities actually known to a Responsible Officer of the Property Trustee, unless such defaults have been cured before the giving of such notice (the term "defaults" for the purposes of this Section 2.7(a) being hereby defined to be an Event of Default as defined in the Indenture, not including any periods of grace provided for therein and irrespective of the giving of any notice provided therein); provided that, except for a default in the payment of principal of (or premium, if any) or interest on any of the Debentures, the Property Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Property Trustee in good faith determines that the withholding of such notice is in the interests of the Holders. (b) The Property Trustee shall not be deemed to have knowledge of any default except: (i) a default under Sections 5.1(a) and 5.1(b) of the Indenture; or 11 (ii) any default as to which the Property Trustee shall have received written notice or of which a Responsible Officer of the Property Trustee charged with the administration of the Declaration shall have actual knowledge. (c) Within ten Business Days after the occurrence of any Event of Default actually known to the Sponsor, the Sponsor shall transmit notice of such Event of Default to the holders of the Capital Securities, the Administrators and the Property Trustee, unless such Event of Default shall have been cured or waived. The Sponsor and the Administrators shall file annually with the Property Trustee a certification as to whether or not they are in compliance with all the conditions and covenants applicable to them under this Declaration. ARTICLE III ORGANIZATION SECTION 3.1. Name. ----------- The Trust is named "LIFE Financial Capital Trust" as such name may be modified from time to time by the Administrators following written notice to the Holders of Securities and the Trustees. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrators. SECTION 3.2. Office. ----------- The address of the principal office of the Trust is c/o LIFE Financial Corporation, 10540 North Magnolia Avenue, Unit B, Riverside, California 92505. On ten Business Days written notice to the Holders of Securities and the Trustees, the Administrators may designate another principal office. SECTION 3.3. Purpose. ----------- The exclusive purposes and functions of the Trust are (a) to issue and sell the Securities, (b) use the proceeds from the sale of the Securities to acquire the Debentures, and (c) except as otherwise limited herein, to engage in only those other activities necessary, advisable or incidental thereto. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, mortgage or pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor trust. SECTION 3.4. Authority. ----------- Except as specifically provided in this Declaration, the Administrators and the Property Trustee shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by a Property Trustee or an Administrator in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees or the Administrators acting on behalf 12 of the Trust, no Person shall be required to inquire into the authority of the Trustees or the Administrators to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. The Administrators shall have only those ministerial duties set forth herein with respect to accomplishing the purposes of the Trust and are not intended to be trustees or fiduciaries with respect to the Trust or the Holders of Securities. The Property Trustee shall have the right, but shall not be obligated except as provided in Section 3.8, to perform those duties assigned to the Administrators. SECTION 3.5. Title to Property of the Trust. ----------- Except as provided in Section 3.8 with respect to the Debentures and the Property Trustee Account or as otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust. SECTION 3.6. Powers and Duties of the Administrators. ----------- The Administrators shall have the power, duty and authority to cause the Trust to engage in the following activities: (a) to issue and sell the Securities in accordance with this Declaration; provided, however, that (i) the Trust may issue no more than one series of Capital Securities (as contemplated in Section 7.1(a)) and no more than one series of Common Securities, (ii) there shall be no interests in the Trust other than the Securities, and (iii) the issuance of Securities shall be limited to a simultaneous issuance of Capital Securities and Common Securities at the Closing Time; (b) in connection with the issue and sale of the Capital Securities, at the direction of and to the extent so directed by the Sponsor, to: (i) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary in order to qualify or register all or part of the Capital Securities in any State in which the Sponsor has determined to qualify or register such Capital Securities for sale; (ii) at the direction of the Sponsor, execute and file an application, prepared by the Sponsor, to the New York Stock Exchange or any other national stock exchange or the National Market System of the Nasdaq Stock Market for listing or quotation of the Capital Securities; (iii) execute and deliver letters, documents, or instruments with DTC and other Clearing Agencies relating to the Capital Securities; 13 (iv) if required, execute and file with the Commission a registration statement on Form 8-A, including any amendments thereto, prepared by the Sponsor, relating to the registration of the Capital Securities under the Exchange Act; (v) execute and enter into the Common Securities Subscription Agreement providing for the purchase from the Trust of the Common Securities; (vi) execute and enter into the Debenture Subscription Agreement providing for the Trust to purchase the Debentures from the Debenture Issuer; and (vi) execute and enter into the Capital Security Guarantee on behalf of the Trust. (c) to acquire the Debentures with the proceeds of the sale of the Capital Securities and the Common Securities; provided, however, that the Administrators shall cause legal title to the Debentures to be held of record in the name of the Property Trustee for the benefit of the Holders; (d) to give the Sponsor and the Property Trustee prompt written notice of the occurrence of a Special Event; (e) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including and with respect to, for the purposes of Section 316(c) of the Trust Indenture Act, Distributions, voting rights, redemptions and conversions, and to issue relevant notices to the Holders of Capital Securities and Holders of Common Securities as to such actions and applicable record dates; (f) to take all actions and perform such duties as may be required of the Administrators pursuant to the terms of this Declaration or the Securities; (g) to bring or defend, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against the Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Property Trustee has the exclusive power to bring such Legal Action; (h) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors and consultants and pay reasonable compensation for such services; (i) to cause the Trust to comply with the Trust's obligations under the Trust Indenture Act; (j) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Property Trustee, which certificate may be executed by any Administrator; 14 (k) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; (l) to act as, or appoint another Person to act as, Registrar and Conversion Agent for the Securities or to appoint a Paying Agent for the Securities as provided in Section 7.5 except for such time as such power to appoint a Paying Agent is vested in the Property Trustee; (m) to give prompt written notice to the Property Trustee and to Holders of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures by extending the interest payment period under the Indenture; (n) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing; (o) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders of the Securities or to enable the Trust to effect the purposes for which the Trust was created; (p) to take any action, not inconsistent with this Declaration or with applicable law, that the Administrators determine in their discretion to be necessary or desirable in carrying out the activities of the Trust as set out in this Section 3.6, including, but not limited to: (i) causing the Trust not to be deemed to be an Investment Company required to be registered under the Investment Company Act; (ii) causing the Trust to be classified for United States federal income tax purposes as a grantor trust; and (iii) cooperating with the Debenture Issuer to ensure that the Debentures will be treated as indebtedness of the Debenture Issuer for United States federal income tax purposes. (q) to take all action necessary to consummate the Public Offering; and (r) to take all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Administrators, on behalf of the Trust. The Administrators must exercise the powers set forth in this Section 3.6 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Administrators shall not take any action that is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. 15 Subject to this Section 3.6, the Administrators shall have none of the powers or the authority of the Property Trustee set forth in Section 3.8. Any expenses incurred by the Administrators pursuant to this Section 3.6 shall be reimbursed by the Debenture Issuer. In addition to the powers set forth above, the Administrators may from time to time designate committees of the Administrators, with such lawfully delegable powers and duties as the Administrators thereby confer, to serve at the pleasure of the Administrators. SECTION 3.7. Prohibition of Actions by the Trust, the Trustees and the ----------- Administrators. (a) The Trust shall not, and the Trustees (including the Property Trustee) and the Administrators shall not, engage in any activity other than as required or authorized by this Declaration. The Trust shall not: (i) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders pursuant to the terms of this Declaration and of the Securities; (ii) acquire any assets other than as expressly provided herein; (iii) possess Trust property for other than a Trust purpose; (iv) make any loans or incur any indebtedness other than loans represented by the Debentures; (v) possess any power or otherwise act in such a way as to vary the Trust assets or the terms of the Securities in any way whatsoever; (vi) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; or (vii) other than as provided in this Declaration or Annex I, (A) direct the time, method and place of conducting any proceeding with respect to any remedy available to the Debenture Trustee, or exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (B) waive any past default that is waivable under the Indenture, (C) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable, or (D) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required unless the Trust shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters to the effect that such modification will not affect the Trust's status as a grantor trust for United States federal income tax purposes. 16 SECTION 3.8. Powers and Duties of the Property Trustee. ----------- (a) The legal title to the Debentures shall be owned by and held of record in the name of the Property Trustee in trust for the benefit of the Holders. The right, title and interest of the Property Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Property Trustee in accordance with Section 5.6. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. (b) The Property Trustee shall not transfer its right, title and interest in the Debentures to the Administrators or to the Delaware Trustee (if the Property Trustee does not also act as Delaware Trustee). (c) The Property Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Trustee Account") in the name of and under the exclusive control of the Property Trustee on behalf of the Holders and, upon the receipt of payments of funds made in respect of the Debentures held by the Property Trustee, deposit such funds into the Property Trustee Account and make payments to the Holders of the Capital Securities and Holders of the Common Securities from the Property Trustee Account in accordance with Section 6.1. Funds in the Property Trustee Account shall be held uninvested until disbursed in accordance with this Declaration. The Property Trustee Account shall be an account that is maintained with a banking institution that is at least in compliance with the capital requirements of regulatory authority regulating such institution; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Capital Securities and the Common Securities to the extent the Debentures are redeemed or mature or the conversion of Capital Securities to the extent the Capital Securities are converted into Common Stock; and (iii) upon written notice of distribution issued by the Administrators in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of certain events. (d) The Property Trustee shall take all actions and perform such duties as may be specifically required of the Property Trustee pursuant to the terms of the Securities. (e) Subject to Section 3.9(a), the Property Trustee may take any Legal Action which arises out of or in connection with an Event of Default of which a Responsible Officer of the Property Trustee has actual knowledge or the Property Trustee's duties and obligations under this Declaration or the Trust Indenture Act and if such Property Trustee shall have failed to take such Legal Action, the Holders of the Capital Securities may, to the fullest extent permitted by law, take such Legal Action, to the same extent as if such Holders of Capital Securities held an aggregate 17 principal amount of Debentures equal to the aggregate liquidation amount of such Capital Securities, without first proceeding against the Property Trustee or the Trust; provided however, that if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay the principal of or premium, if any, or interest on the Debentures on the date such principal, premium, if any, or interest is otherwise payable (or in the case of prepayment, on the prepayment date), then a Holder of Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or premium, if any, or interest on the Debentures having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Holders of the Common Securities will be subrogated to the rights of such Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of Capital Securities in such Direct Action. Except as provided in the preceding sentences, the Holders of Capital Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. (f) The Property Trustee shall not resign as a Trustee unless either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders pursuant to the terms of the Securities; or (ii) a successor property trustee possessing the qualifications to act as Property Trustee under Section 5.3 (a "Successor Property Trustee") has been appointed and has accepted that appointment in accordance with Section 5.6. (g) The Property Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of Debentures under the Indenture and, if an Event of Default actually known to a Responsible Officer of the Property Trustee occurs and is continuing, the Property Trustee, for the benefit of Holders, shall enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to the terms of such Securities. (h) The Property Trustee shall be authorized to undertake any actions set forth in Section 317(a) of the Trust Indenture Act. (i) For such time as the Property Trustee is the Paying Agent, the Property Trustee may authorize one or more Persons to act as additional Paying Agents and to pay Distributions, redemption payments or liquidation payments on behalf of the Trust with respect to all Securities and any such Paying Agent shall comply with Section 317(b) of the Trust Indenture Act. Any such additional Paying Agent may be removed by the Property Trustee at any time the Property Trustee remains as Paying Agent and a successor Paying Agent or additional Paying Agents may be (but are not required to be) appointed at any time by the Property Trustee while the Property Trustee is so acting as Paying Agent. (j) The Property Trustee shall have the power and authority to act with respect to any of the duties, liabilities, powers or the authority of the Administrators set forth in Sections 3.6(b)(ii), 18 (m) or (o), but shall not have a duty to do any such act unless specifically directed to do so in writing by the Sponsor and then shall be fully protected in acting pursuant to such direction. In the event of a conflict between the action of the Administrators and the action of the Property Trustee, the action of the Property Trustee shall prevail. The Property Trustee must exercise the powers set forth in this Section 3.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Property Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 3.3. SECTION 3.9. Certain Additional Duties and Responsibilities of the ----------- Property Trustee. (a) The Property Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and in the Securities and no implied covenants shall be read into this Declaration against the Property Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer of the Property Trustee has actual knowledge, the Property Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) No provision of this Declaration shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Property Trustee shall be determined solely by the express provisions of this Declaration and in the Securities and the Property Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Declaration and in the Securities, and no implied covenants or obligations shall be read into this Declaration against the Property Trustee; and (B) in the absence of bad faith on the part of the Property Trustee, the Property Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Property Trustee and conforming to the requirements of this Declaration; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Property Trustee, the Property Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Declaration; 19 (ii) the Property Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Declaration; (iv) no provision of this Declaration shall require the Property Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Declaration or indemnity reasonably satisfactory to the Property Trustee against such risk or liability is not reasonably assured to it; (v) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Property Trustee Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Declaration and the Trust Indenture Act; (vi) the Property Trustee shall have no duty or liability for or with respect to the value, genuineness, existence or sufficiency of the Debentures or the payment of any taxes or assessments levied thereon or in connection therewith; (vii) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the Sponsor. Money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Property Trustee Account maintained by the Property Trustee pursuant to Section 3.8(c)(i) and except to the extent otherwise required by law; and (viii) the Property Trustee shall not be responsible for monitoring the compliance by the Administrators or the Sponsor with their respective duties under this Declaration, nor shall the Property Trustee be liable for any default or misconduct of the Administrators or the Sponsor. 20 SECTION 3.10. Certain Rights of the Property Trustee. ------------ (a) Subject to the provisions of Section 3.9: (i) the Property Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Sponsor or the Administrators contemplated by this Declaration may be sufficiently evidenced by an Officer's Certificate; (iii) whenever in the administration of this Declaration, the Property Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed), in the absence of bad faith on its part, may request and conclusively rely upon an Officer's Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Administrators; (iv) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or registration thereof; (v) the Property Trustee may consult with counsel or other experts of its selection and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion, such counsel may be counsel to the Sponsor or any of its Affiliates, and may include any of its employees. The Property Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (vi) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any Holder, unless such Holder shall have provided to the Property Trustee security and indemnity, reasonably satisfactory to the Property Trustee, against the costs, expenses (including reasonable attorney's fees and expenses and the expenses of the Property Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Property Trustee; provided, that, nothing contained in this Section 3.10(a)(vi) shall be taken to relieve the Property Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Declaration; 21 (vii) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Property Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys and the Property Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (ix) any action taken by the Property Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Property Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Property Trustee to so act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Property Trustees' or its agent's taking such action; (x) whenever in the administration of this Declaration the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Property Trustee (i) may request instructions from the Holders which instructions may only be given by the Holders of the same proportion in liquidation amount of the Securities as would be entitled to direct the Property Trustee under the terms of the Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions; (xi) except as otherwise expressly provided by this Declaration, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration; and (xii) the Property Trustee shall not be liable for any action taken, suffered or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Declaration. (b) No provision of this Declaration shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. 22 SECTION 3.11. Delaware Trustee. ------------ Notwithstanding any other provision of this Declaration other than Section 5.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities, of the Administrators or the Property Trustee described in this Declaration. Except as set forth in Section 5.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. SECTION 3.12. Not Responsible for Recitals or Issuance of Securities. ------------ The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and none of the Trustees or the Administrators assume any responsibility for their correctness. None of the Trustees or the Administrators make any representations as to the value or condition of the property of the Trust or any part thereof. None of the Trustees or the Administrators make any representations as to the validity or sufficiency of this Declaration, the Debentures or the Securities. SECTION 3.13. Duration of Trust. ------------ The Trust, unless dissolved pursuant to the provisions of Article VIII hereof, shall have existence up to [_____________, 2028]. SECTION 3.14. Mergers. ------------ (a) The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any Person, except as described in Section 3.14(b) and (c) and Section 3 of Annex I. (b) The Trust may, at the request of the Sponsor, as Holder of the Common Securities, and without the consent of the Holders of the Capital Securities, the Delaware Trustee or the Property Trustee, merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, a trust organized as such under the laws of any State; provided that: (i) if the Trust is not the surviving entity, such successor entity (the "Successor Entity") either: (A) expressly assumes all of the obligations of the Trust under the Securities; or (B) substitutes for the Securities other securities having substantially the same terms as the Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Securities rank with respect to Distributions and payments upon liquidation, redemption and otherwise; 23 (ii) the Sponsor expressly appoints a trustee of the Successor Entity that possesses the same powers and duties as the Property Trustee as the Holder of the Debentures; (iii) the Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with another organization on which the Capital Securities are then listed or quoted, if any; (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders (including any Successor Securities) in any material respect (other than with respect to any dilution of such Holders' interests in the new entity); (v) such Successor Entity has a purpose substantially identical to that of the Trust; (vi) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Sponsor has received an opinion of an independent counsel to the Trust experienced in such matters to the effect that: (A) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders (including any Successor Securities) in any material respect (other than with respect to any dilution of the Holders' interests in the new entity); and (B) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor the Successor Entity will be required to register as an Investment Company; and (vii) the Sponsor or any permitted successor or assignee owns all of the common securities of such Successor Entity and guarantees the obligations of such Successor Entity under the Successor Securities at least to the extent provided by the Capital Securities Guarantee and the Common Securities Guarantee. (c) Notwithstanding Section 3.14(b), the Trust shall not, except with the consent of Holders of 100% in liquidation amount of the Securities, consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the Successor Entity not to be classified as a grantor trust for United States federal income tax purposes or result in the Holders recognizing any gain or loss for federal income tax purposes. 24 ARTICLE IV SPONSOR SECTION 4.1. Sponsor's Purchase of Common Securities. ----------- At the Closing Time, the Sponsor will purchase all of the Common Securities then issued by the Trust, in an amount equal to approximately, but not less than, 3% of the capital of the Trust, at the same time as the Capital Securities are issued and sold. SECTION 4.2. Responsibilities of the Sponsor. ----------- In connection with the issue and sale of the Capital Securities, the Sponsor shall have the exclusive right and responsibility to engage in the following activities: (a) to prepare one or more prospectuses (each a "Prospectus") in preliminary and final form, in relation to the offering and sale of Capital Securities in the Public Offering, and to execute and file with the Commission, the Registration Statement, including any amendments thereto; (b) to determine the States in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States; (c) if deemed necessary or advisable by the Sponsor, to prepare for filing by the Trust an application to the New York Stock Exchange or any other national stock exchange or the Nasdaq National Market for listing or quotation of the Capital Securities; (d) to prepare for filing by the Trust with the Commission a registration statement on Form 8-A (if necessary) relating to the registration of the Capital Securities under Section 12(b) or 12(g), as appropriate, of the Exchange Act, including any amendments thereto; and (e) to negotiate the terms of and execute the Underwriting Agreement in connection with the Public Offering, and other agreements, documents and instruments providing for the sale of the Capital Securities. SECTION 4.3. Right to Proceed. ----------- The Sponsor acknowledges the rights of the Holders of Capital Securities, in the event that a failure of the Trust to pay Distributions on the Capital Securities is attributable to the failure of the Company to pay interest or principal on the Debentures, to institute a Direct Action against the Debenture Issuer for enforcement of its payment obligations on the Debentures. 25 ARTICLE V TRUSTEES AND ADMINISTRATORS SECTION 5.1. Number of Trustees and Administrators; Appointment of Co- ----------- Trustee. The number of Trustees initially shall be two (2) and the number of Administrators initially shall be two (2), and: (a) at any time before the issuance of any Securities, the Sponsor, by written instrument, may increase or decrease the number of Trustees and Administrators; and (b) after the issuance of any Securities, the number of Trustees and Administrators may be increased or decreased by vote of the Holders of a Majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; provided, however, that, the number of Trustees shall in no event be less than two (2); and provided further that (1) one Trustee, in the case of a natural person, shall be a person who is a resident of the State of Delaware or that, if not a natural person, is an entity which has its principal place of business in the State of Delaware and is capable of acting in such position pursuant to Section 3807 of the Business Trust Act; (2) there shall be at least one administrator who is an employee or officer of, or is affiliated with the Sponsor (an "Administrator"); and (3) one Trustee shall be the Property Trustee for so long as this Declaration is required to qualify as an indenture under the Trust Indenture Act, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements. Notwithstanding the above, unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust's property may at the time be located, the Holders of a Majority in liquidation amount of the Common Securities acting as a class at a meeting of the Holders of the Common Securities, and the Administrators shall have power to appoint one or more persons either to act as a co-trustee, jointly with the Property Trustee, of all or any part of the Trust's property, or to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such person or persons in such capacity any property, title, right or power deemed necessary or desirable, subject to the provisions of this Declaration. In case an Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make any such appointment of a co-trustee. (c) Effective as of the date of this Declaration, without any further action by any Person, the Initial Trustee shall cease to be a trustee of the Trust and the only trustees of the Trust shall be the Trustees, as their number may increase or decrease from time to time in accordance with the provisions of this Declaration. SECTION 5.2. Delaware Trustee. ----------- If required by the Business Trust Act, one Trustee (the "Delaware Trustee") shall be: (a) a natural person who is a resident of the State of Delaware; or 26 (b) if not a natural person, an entity which has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, provided that, if the Property Trustee has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law, then the Property Trustee shall also be the Delaware Trustee and Section 3.11 shall have no application. (c) The initial Delaware Trustee shall be: Delaware Trust Capital Management 3 Beaver Valley Road, FC 5-4-2-6 Wilmington, Delaware 19803 Attention: Corporate Trust Administration SECTION 5.3. Property Trustee; Eligibility. ----------- (a) There shall at all times be one Trustee (the "Property Trustee") which shall act as Property Trustee which shall: (i) not be an Affiliate of the Sponsor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a Person permitted by the Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least __ million U.S. dollars ($__________), and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 5.3(a)(ii), the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Property Trustee shall cease to be eligible to so act under Section 5.3(a), the Property Trustee shall immediately resign in the manner and with the effect set forth in Section 5.6(c). (c) If the Property Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Property Trustee and the Holder of the Common Securities (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act, subject to the penultimate paragraph thereof. (d) The Capital Securities Guarantee shall be deemed to be specifically described in this Declaration for purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. 27 (e) The initial Property Trustee shall be: State Street Bank and Trust Company Two International Place Boston, Massachusetts 02110 Attention: Corporate Trust Administration SECTION 5.4. Certain Qualifications of Administrators and Delaware ----------- Trustee Generally. Each Administrator and the Delaware Trustee (unless the Property Trustee also acts as Delaware Trustee) shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more Authorized Officers. SECTION 5.5. Administrators. ----------- The initial Administrators shall be: Daniel L. Perl and L. Bruce Mills, Jr. LIFE Financial Corporation 10540 North Magnolia Avenue, Unit B Riverside, California 92505 (a) Except as expressly set forth in this Declaration and except if a meeting of the Administrators is called with respect to any matter over which the Administrators have power to act, any power of the Administrators may be exercised by, or with the consent of, any one such Administrator. (b) Except as otherwise required by the Business Trust Act or applicable law, any Administrator is authorized to execute on behalf of the Trust any documents which the Administrators have the power and authority to cause the Trust to execute pursuant to Section 3.6. SECTION 5.6. Appointment, Removal and Resignation of Trustees and ----------- Administrators. (a) Subject to Section 5.6(b) of this Declaration and to Section 7(b) of Annex I hereto, the Trustees and Administrators may be appointed or removed without cause at any time: (i) until the issuance of any Securities, by written instrument executed by the Sponsor; (ii) unless an Event of Default shall have occurred and be continuing after the issuance of any Securities and, with respect to any Administrator, at any time after the issuance of any Securities, by vote of the Holders of a Majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; and 28 (iii) if an Event of Default shall have occurred and be continuing after the issuance of the Securities, with respect to the Property Trustee or the Delaware Trustee, by vote of Holders of a Majority in liquidation amount of the Capital Securities voting as a class at a meeting of Holders of the Capital Securities. (iv) In no event will the Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Holders of the Common Securities. (b) (i) The Trustee that acts as Property Trustee shall not be removed in accordance with Section 5.6(a) until a Successor Property Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Property Trustee and delivered to the Administrators and the Sponsor; and (ii) the Trustee that acts as Delaware Trustee shall not be removed in accordance with this Section 5.6(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Sections 5.2 and 5.4 (a "Successor Delaware Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the Administrators and the Sponsor. (c) A Trustee or Administrator appointed to office shall hold office until his successor shall have been appointed or until his death, removal or resignation. Any Trustee or Administrator may resign from office (without need for prior or subsequent accounting) by an instrument in writing signed by the Trustee or the Administrator, as the case may be, and delivered to the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: (i) No such resignation of the Trustee that acts as the Property Trustee shall be effective: (A) until a Successor Property Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Property Trustee and delivered to the Trust, the Sponsor and the resigning Property Trustee; or (B) until the assets of the Trust have been completely liquidated and the proceeds thereof distributed to the Holders of the Securities; and (ii) no such resignation of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Delaware Trustee and delivered to the Trust, the Sponsor and the resigning Delaware Trustee. 29 (d) The Holders of the Common Securities shall use their best efforts to promptly appoint a Successor Delaware Trustee or Successor Property Trustee, as the case may be, if the Property Trustee or the Delaware Trustee delivers an instrument of resignation in accordance with this Section 5.6. (e) If no Successor Property Trustee or Successor Delaware Trustee shall have been appointed and accepted appointment as provided in this Section 5.6 within 60 days after delivery of an instrument of resignation or removal, the Property Trustee or Delaware Trustee resigning or being removed, as applicable, may petition any court of competent jurisdiction for appointment of a Successor Property Trustee or Successor Delaware Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Property Trustee or Successor Delaware Trustee, as the case may be. (f) No Property Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Property Trustee or Successor Delaware Trustee, as the case may be. SECTION 5.7. Vacancies Among Trustees and Administrators. ----------- If a Trustee or Administrator ceases to hold office for any reason and the number of Trustees or Administrators, as the case may be, is not reduced pursuant to Section 5.1, or if the number of Trustees or Administrators, as the case may be, is increased pursuant to Section 5.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Administrators or, if there are more than two, a majority of the Administrators, shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 5.6. SECTION 5.8. Effect of Vacancies. ----------- The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee or an Administrator shall not operate to dissolve, terminate or annul the Trust. Whenever a vacancy in the number of Administrators shall occur, until such vacancy is filled by the appointment of an Administrator in accordance with Section 5.6, the Administrators in office, regardless of their number, shall have all the powers granted to the Administrators and shall discharge all the duties imposed upon the Administrators by this Declaration. SECTION 5.9. Meetings. ----------- If there is more than one Administrator, meetings of the Administrators shall be held from time to time upon the call of any Administrator. Regular meetings of the Administrators may be held at a time and place fixed by resolution of the Administrators. Notice of any in-person meetings of the Administrators shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not 30 less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of an Administrator at a meeting shall constitute a waiver of notice of such meeting except where an Administrator attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Administrators may be taken at a meeting by vote of a majority of the Administrators present (whether in person or by telephone) and eligible to vote with respect to such matter, provided that a Quorum is present, or without a meeting by the unanimous written consent of the Administrators. In the event there is only one Administrator, any and all action of such Administrator shall be evidenced by a written consent of such Administrator. SECTION 5.10. Delegation of Power. ------------ (a) Any Administrator may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 3.6. (b) The Trustees and Administrators shall have power to delegate from time to time to such of their number or to such of the other Administrators, as the case may be, or to officers of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Trustees or Administrators, as the case may be, or otherwise as the Trustees or Administrators, as the case may be, may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. SECTION 5.11. Merger, Conversion, Consolidation or Succession to ------------ Business. Any Person into which the Property Trustee or the Delaware Trustee or any Administrator that is not a natural person, as the case may be, may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Property Trustee, the Delaware Trustee or the Administrator, as the case may be, shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Property Trustee, the Delaware Trustee or the Administrator, as the case may be, shall be the successor of the Property Trustee, the Delaware Trustee or the Administrator, as the case may be, hereunder, provided such Person shall be otherwise qualified and eligible under this Article and applicable law, without the execution or filing of any paper or any further act on the part of any of the parties hereto. ARTICLE VI DISTRIBUTIONS SECTION 6.1. Distributions. ----------- Holders shall receive Distributions in accordance with the applicable terms of the relevant Holders' Securities. If and to the extent that the Debenture Issuer makes a payment of interest (including Compounded Interest (as defined in the Indenture) and Additional Interest (as defined in 31 the Indenture)), premium and/or principal on the Debentures held by the Property Trustee (the amount of any such payment being a "Payment Amount"), the Property Trustee shall and is directed, to the extent funds are available for that purpose, to make a distribution (a "Distribution") of the Payment Amount to Holders in accordance with the respective term of the Securities held by them. ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1. General Provisions Regarding Securities. ----------- (a) The Administrators shall on behalf of the Trust issue one class of ____% Convertible Trust Preferred Securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Capital Securities") and one class of __% Convertible Trust Common Securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Common Securities"). The Trust shall issue no securities or other interests in the assets of the Trust other than the Securities. (b) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (c) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and non- assessable. (d) Every Person, by virtue of having become a Holder or a Capital Security Beneficial Owner in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration. SECTION 7.2. Execution and Authentication. ----------- (a) The Securities shall be signed on behalf of the Trust by an Administrator. In case any Administrator who shall have signed any of the Securities shall cease to be such Administrator before the Securities so signed shall be delivered by the Trust, such Securities nevertheless may be delivered as though the Person who signed such Securities had not ceased to be such Administrator; and any Securities may be signed on behalf of the Trust by such Persons who, at the actual date of execution of such Security, shall be the Administrators of the Trust, although at the date of the execution and delivery of the Declaration any such Person was not such an Administrator. (b) One Administrator shall sign the Capital Securities for the Trust by manual or facsimile signature. Unless otherwise determined by the Trust, such signature shall, in the case of Common Securities, be a manual signature. (c) A Capital Security shall not be valid until authenticated by the manual signature of an authorized officer of the Property Trustee. The signature shall be conclusive evidence that the Capital Security has been authenticated under this Declaration. 32 (d) Upon a written order of the Trust signed by one Administrator, the Property Trustee shall authenticate the Capital Securities for original issue. The aggregate number of Capital Securities outstanding at any time shall not exceed the number set forth in the Terms in Annex I hereto except as provided in Section 7.7. (e) The Property Trustee may appoint an authenticating agent acceptable to the Trust to authenticate Capital Securities. An authenticating agent may authenticate Capital Securities whenever the Property Trustee may do so. Each reference in this Declaration to authentication by the Property Trustee includes authentication by such agent. An authenticating agent has the same rights as the Property Trustee to deal with the Sponsor or an Affiliate. SECTION 7.3. Form and Dating. ----------- The Capital Securities and the Property Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1 and the Common Securities shall be substantially in the form of Exhibit B-1, each of which is hereby incorporated in and expressly made a part of this Declaration. Certificates representing the Securities may be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrators, as evidenced by their execution thereof. The Securities may have letters, CUSIP or other numbers, notations or other marks of identification or designation and such legends or endorsements required by law, stock exchange rule, agreements to which the Trust is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Trust). The Trust at the direction of the Sponsor shall furnish any such legend not contained in Exhibit A-1 to the Property Trustee in writing. Each Capital Security shall be dated the date of its authentication. The terms and provisions of the Securities set forth in Annex I and the forms of Securities set forth in Exhibits A-1 and B-1 are part of the terms of this Declaration and to the extent applicable, the Property Trustee and the Sponsor, by their execution and delivery of this Declaration, expressly agree to such terms and provisions and to be bound thereby. (a) Global Securities. Unless otherwise specified in the terms of the Capital Securities, the Capital Securities issued in the Public Offering shall be issued in the form of one or more, permanent global Securities in definitive, fully registered form without distribution coupons with the global legends set forth in Exhibit A-1 hereto (each a "Global Capital Security"), which shall be deposited on behalf of the purchasers of the Capital Securities represented thereby with the Property Trustee, at its Boston office, as custodian for the Clearing Agency, and registered in the name of the Clearing Agency or a nominee of the Clearing Agency, duly executed by the Trust and authenticated by the Property Trustee as hereinafter provided. The Trust at the direction of the Sponsor shall furnish any such legend not contained in Exhibit A-1 to the Property Trustee in writing. The number of Capital Securities represented by a Global Capital Security may from time to time be increased or decreased by adjustments made on the records of the Property Trustee and the Clearing Agency or its nominee as hereinafter provided. 33 (b) Book-Entry Provisions. This Section 7.3(b) shall apply only to the Global Capital Securities and such other Capital Securities in global form as may be authorized by the Trust to be deposited with or on behalf of the Clearing Agency. The Trust shall execute and the Property Trustee shall, in accordance with Section 7.2, authenticate and make available for delivery initially one or more Global Capital Securities that (i) shall be registered in the name of Cede & Co. or other nominee of such Clearing Agency and (ii) shall be delivered by the Property Trustee to such Clearing Agency or pursuant to such Clearing Agency's written instructions or held by the Property Trustee as custodian for the Clearing Agency. Members of, or participants in, the Clearing Agency ("Participants") shall have no rights under this Declaration with respect to any Global Capital Security held on their behalf by the Clearing Agency or by the Property Trustee as the custodian of the Clearing Agency or under such Global Capital Security, and the Clearing Agency may be treated by the Trust, the Property Trustee and any agent of the Trust or the Property Trustee as the absolute owner of such Global Capital Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Trust, the Property Trustee or any agent of the Trust or the Property Trustee from giving effect to any written certification, proxy or other authorization furnished by the Clearing Agency or impair, as between the Clearing Agency and its Participants, the operation of customary practices of such Clearing Agency governing the exercise of the rights of a holder of a beneficial interest in any Global Capital Security. SECTION 7.4. Definitive Capital Securities. ----------- Except as provided in this Section 7.4, owners of beneficial interests in a Global Capital Security will not be entitled to receive physical delivery of certificated Capital Securities ("Definitive Capital Securities"). (a) A Global Capital Security deposited with the Clearing Agency or with the Property Trustee as custodian for the Clearing Agency pursuant to Section 7.3 shall be transferred to the beneficial owners thereof in the form of Definitive Capital Securities only if such transfer complies with Section 9.2 and (i) the Clearing Agency notifies the Sponsor that it is unwilling or unable to continue as Clearing Agency for such Global Capital Security or if at any time such Clearing Agency ceases to be a "clearing agency" registered under the Exchange Act and a clearing agency is not appointed by the Sponsor within 90 days of such notice or within 90 days after the Sponsor becomes aware of such non-registration, (ii) a Default or an Event of Default has occurred and is continuing or (iii) the Trust at its sole discretion elects to cause the issuance of Definitive Capital Securities. (b) Any Global Capital Security that is transferable to the beneficial owners thereof in the form of Definitive Capital Securities pursuant to this Section 7.4 shall be surrendered by the Clearing Agency to the Property Trustee located in ________________________, to be so transferred, in whole or from time to time in part, without charge, and the Property Trustee shall authenticate and make available for delivery, upon such transfer of each portion of such Global Capital Security, an equal aggregate liquidation amount of Securities in the form of Definitive 34 Capital Securities. Any portion of a Global Capital Security transferred pursuant to this Section shall be registered in such names as the Clearing Agency shall direct. (c) Subject to the provisions of Section 7.4(b), the Holder of a Global Capital Security may grant proxies and otherwise authorize any person, including Participants and persons that may hold interests through Participants, to take any action which such Holder is entitled to take under this Declaration or the Securities. (d) In the event of the occurrence of any of the events specified in Section 7.4(a), the Trust will promptly make available to the Property Trustee a reasonable supply of Definitive Capital Securities in fully registered form without distribution coupons. SECTION 7.5. Registrar, Paying Agent and Conversion Agent. ----------- The Trust shall maintain in ___________________________________________, (i) an office or agency where Capital Securities may be presented for registration of transfer ("Registrar"), (ii) an office or agency where Capital Securities may be presented for payment ("Paying Agent") and (iii) an office or agency where Securities may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Capital Securities and of their transfer. Subject to Section 3.8(i), the Trust may appoint the Registrar, the Paying Agent and the Conversion Agent and may appoint one or more co-registrars, one or more additional paying agents and one or more additional conversion agents in such other locations as it shall determine. The term "Registrar" includes any additional registrar, "Paying Agent" includes any additional paying agent and the term "Conversion Agent" includes any additional conversion agent. Subject to Section 3.8(i), the Trust may change any Paying Agent, Registrar, co- registrar or Conversion Agent without prior notice to any Holder. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days written notice to the Trustees and the Administrators. The Trust shall notify the Property Trustee of the name and address of any Agent not a party to this Declaration. If the Trust fails to appoint or maintain another entity as Registrar, Paying Agent or Conversion Agent, the Property Trustee shall act as such. The Trust or any of its Affiliates may act as Paying Agent, Registrar or Conversion Agent. The Trust shall act as Paying Agent, Registrar, co-registrar and Conversion Agent for the Common Securities. The Trust initially appoints the Property Trustee as Registrar, Paying Agent and Conversion Agent for the Capital Securities. SECTION 7.6. Paying Agent to Hold Money in Trust. ----------- The Trust shall require each Paying Agent other than the Property Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Property Trustee all money held by the Paying Agent for the payment of liquidation amounts or Distributions on the Securities, and will notify the Property Trustee if there are insufficient funds for such purpose. While any such insufficiency continues, the Property Trustee may require a Paying Agent to pay all money held by it to the Property Trustee. The Trust at any time may require a Paying Agent to pay all money held by it to the Property Trustee and to account for any money disbursed by it. Upon payment over to 35 the Property Trustee, the Paying Agent (if other than the Trust or an Affiliate of the Trust) shall have no further liability for the money. If the Trust or the Sponsor or an Affiliate of the Trust or the Sponsor acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. SECTION 7.7. Replacement Securities. ----------- If a Holder claims that a Security owned by it has been lost, destroyed or wrongfully taken or if such Security is mutilated and is surrendered to the Trust or in the case of the Capital Securities to the Property Trustee, the Trust shall issue and the Property Trustee shall authenticate a replacement Security if the Property Trustee's and the Trust's requirements, as the case may be, are met. At the request of the Property Trustee or the Sponsor, an indemnity bond may be required from the Holder which, in the judgment of the Property Trustee, is sufficient to protect the Trustees, the Administrators, the Sponsor or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Trust may charge such Holder for its expenses in replacing a Security. Every replacement Security is an additional beneficial interest in the Trust. SECTION 7.8. Outstanding Capital Securities. ----------- The Capital Securities outstanding at any time are all the Capital Securities authenticated by the Property Trustee except for those canceled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Capital Security is replaced or purchased pursuant to Section 7.7 hereof, it ceases to be outstanding unless the Property Trustee receives proof satisfactory to it that the replaced, paid or purchased Capital Security is held by a bona fide purchaser. If Capital Securities are considered paid in accordance with the terms of this Declaration, they cease to be outstanding and Distributions on them shall cease to accumulate. A Capital Security does not cease to be outstanding because one of the Trust, the Sponsor or an Affiliate of the Sponsor holds the Security. SECTION 7.9. Capital Securities in Treasury. ----------- In determining whether the Holders of the required amount of Securities have concurred in any direction, waiver or consent, Capital Securities owned by the Trust, the Sponsor or an Affiliate of the Sponsor, as the case may be, shall be disregarded and deemed not to be outstanding, except that for the purposes of determining whether the Property Trustee shall be fully protected in relying on any such direction, waiver or consent, only Securities which the Property Trustee actually knows are so owned shall be so disregarded. 36 SECTION 7.10. Temporary Securities. ------------ Until Definitive Capital Securities are ready for delivery, the Trust may prepare and, in the case of the Capital Securities, the Property Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Trust considers appropriate for temporary Securities. Without unreasonable delay, the Trust shall prepare and, in the case of the Capital Securities, the Property Trustee shall authenticate definitive Securities in exchange for temporary Securities. SECTION 7.11. Cancellation. ------------ The Trust at any time may deliver Capital Securities to the Property Trustee for cancellation. The Registrar, Paying Agent and Conversion Agent shall forward to the Property Trustee any Capital Securities surrendered to them for registration of transfer, redemption, conversion, exchange or payment. The Property Trustee shall promptly cancel all Capital Securities, surrendered for registration of transfer, redemption, conversion, exchange, payment, replacement or cancellation and shall dispose of canceled Capital Securities as the Trust directs, provided that the Property Trustee shall not be obligated to destroy Capital Securities. The Trust may not issue new Capital Securities to replace Capital Securities that it has paid or that have been delivered to the Property Trustee for cancellation or that any holder has converted. SECTION 7.12. CUSIP. ------------ The Trust in issuing the Capital Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Property Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders of Capital Securities; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Capital Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Capital Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Sponsor will promptly notify the Property Trustee of any change in the CUSIP numbers. ARTICLE VIII DISSOLUTION AND TERMINATION OF TRUST SECTION 8.1. Dissolution and Termination of Trust. ----------- (a) The Trust shall dissolve: (i) upon the bankruptcy of the Sponsor; (ii) upon the filing of a certificate of dissolution or liquidation or its equivalent with respect to the Sponsor; or the revocation of the Sponsor's charter and the expiration of 90 days after the date of revocation without a reinstatement thereof; 37 (iii) upon receipt by the Property Trustee of written notice from the Holder of the Common Securities directing the Property Trustee to dissolve the Trust (which direction is optional, and except as otherwise expressly provided below, within the discretion of the Holder of the Common Securities) and provided, further, that such direction (and the resulting distribution of a Like Amount of the Debentures as provided in Annex I hereto) is conditioned on (x) the receipt by the Sponsor or the Trust, as the case requires, of any required regulatory approval, and (y) the Administrator's receipt of an opinion of a tax counsel experienced in such matters (a "No Recognition Opinion"), which opinion may rely on published rulings of the Internal Revenue Service, to the effect that the Holders will not recognize any gain or loss for United States federal income tax purposes as a result of the dissolution of the Trust (and the resulting distribution of Debentures); (iv) upon the entry of a decree of judicial dissolution of the Trust by a court of competent jurisdiction; (v) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities; (vi) upon the repayment of the Debentures or at such time as no Debentures are outstanding; or (vii) the expiration of the term of the Trust provided in Section 3.13. (b) As soon as is practicable after the occurrence of an event referred to in Section 8.1(a) and after satisfaction of liabilities to creditors, and subject to the terms set forth in Annex I hereto, the Administrators (each of whom is hereby authorized to take such action) shall file a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 3.9 and Article X shall survive the termination of the Trust. ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1. Transfer of Securities. ----------- (a) Securities may only be transferred, in whole or in part, only in accordance with the terms and conditions set forth in this Declaration and in the terms of the Securities. To the fullest extent permitted by law, any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void. (b) The Sponsor may not transfer the Common Securities, except to the extent pursuant to a transaction not prohibited by Article X of the Indenture. 38 (c) The Administrators shall provide for the registration of Securities and of the transfer of Securities, which will be effected without charge but only upon payment (with such indemnity as the Administrators may require) in respect of any tax or other governmental charges that may be imposed in relation to it. Upon surrender for registration of transfer of any Securities, the Administrators shall cause one or more new Securities to be issued in the name of the designated transferee or transferees. Every Security surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Administrators and the Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Security surrendered for registration of transfer shall be canceled by the Property Trustee in accordance with Section 7.11. A transferee of a Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Security. By acceptance of a Security, each transferee shall be deemed to have agreed to be bound by this Declaration. SECTION 9.2. Transfer Procedures and Restrictions. ----------- (a) Transfer and Exchange of Definitive Capital Securities. When Definitive Capital Securities are presented to the Registrar or co-Registrar: (x) to register the transfer of such Definitive Capital Securities; or (y) to exchange such Definitive Capital Securities for an equal number of Definitive Capital Securities, the Registrar or co-registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Capital Securities surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Administrators and the Registrar or co-registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (b) Restrictions on Transfer of a Definitive Capital Security for a Beneficial Interest in a Global Capital Security. A Definitive Capital Security may not be exchanged for a beneficial interest in a Global Capital Security except upon satisfaction of the requirements set forth below. Upon receipt by the Property Trustee of a Definitive Capital Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Registrar and the Administrators, together with written instructions directing the Property Trustee to make, or to direct the Clearing Agency to make, an adjustment on its books and records with respect to the appropriate Global Capital Security to reflect an increase in the number of the Capital Securities represented by such Global Capital Security, then the Property Trustee shall cancel such Definitive Capital Security and cause, or direct the Clearing Agency to cause, the aggregate number of Capital Securities represented by the appropriate Global Capital Security to be increased accordingly. If no Global Capital Securities are then outstanding, the Trust shall issue and the Property Trustee shall authenticate, upon written order of any Administrator, an appropriate number of Capital Securities in global form. (c) Transfer and Exchange of Global Capital Securities. Subject to Section 9.02(f), the transfer and exchange of Global Capital Securities or beneficial interests therein shall be effected through the Clearing Agency, in accordance with this Declaration (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Clearing Agency therefor. 39 (d) Transfer of a Beneficial Interest in a Global Capital Security for a Definitive Capital Security. (i) Subject to Section 7.4, any Person having a beneficial interest in a Global Capital Security may upon request, but only upon 20 days prior notice to the Property Trustee, and if accompanied by the information specified below, exchange such beneficial interest for a Definitive Capital Security representing the same number of Capital Securities. Upon receipt by the Property Trustee from the Clearing Agency or its nominee on behalf of any Person having a beneficial interest in a Global Capital Security of written instructions or such other form of instructions as is customary for the Clearing Agency or the Person designated by the Clearing Agency as having such a beneficial interest in a Global Capital Security and a certification from the transferor (in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1), which may be submitted by facsimile, then the Property Trustee will cause the aggregate number of Capital Securities represented by Global Capital Securities to be reduced on its books and records and, following such reduction, the Trust will execute and the Property Trustee will authenticate and make available for delivery to the transferee a Definitive Capital Security. (ii) Definitive Capital Securities issued in exchange for a beneficial interest in a Global Capital Security pursuant to this Section 9.2(d) shall be registered in such names and in such denominations as the Clearing Agency, pursuant to instructions from its Participants or indirect participants or otherwise, shall instruct the Property Trustee in writing. The Property Trustee shall deliver such Capital Securities to the Persons in whose names such Capital Securities are so registered in accordance with such instructions of the Clearing Agency. (e) Restrictions on Transfer and Exchange of Global Capital Securities. Notwithstanding any other provisions of this Declaration (other than the provisions set forth in subsection (f) of this Section 9.2), a Global Capital Security may not be transferred as a whole except by the Clearing Agency to a nominee of the Clearing Agency or another nominee of the Clearing Agency or by the Clearing Agency or any such nominee to a successor Clearing Agency or a nominee of such successor Clearing Agency. (f) Authentication of Definitive Capital Securities. If at any time: (i) the Clearing Agency notifies the Sponsor that it is unwilling or unable to continue as Clearing Agency for such Global Capital Security or if at any time such Clearing Agency ceases to be a "clearing agency" registered under the Exchange Act and a clearing agency is not appointed by the Sponsor within 90 days of such notice or within 90 days after the Sponsor becomes aware of such non-registration, (ii) there occurs a Default or an Event of Default which is continuing, or (iii) the Trust, in its sole discretion, notifies the Property Trustee in writing that it elects to cause the issuance of Definitive Capital Securities under this Declaration, then the Trust will execute, and the Property Trustee, upon receipt of a written order of the Trust signed by one 40 Administrator requesting the authentication and delivery of Definitive Capital Securities to the Persons designated by the Trust, will authenticate and make available for delivery Definitive Capital Securities, equal in number to the number of Capital Securities represented by the Global Capital Securities, in exchange for such Global Capital Securities. (g) Cancellation or Adjustment of Global Capital Security. At such time as all beneficial interests in a Global Capital Security have either been exchanged for Definitive Capital Securities to the extent permitted by this Declaration or redeemed, converted, repurchased or canceled in accordance with the terms of this Declaration, such Global Capital Security shall be returned to the Clearing Agency for cancellation or retained and canceled by the Property Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Capital Security is exchanged for Definitive Capital Securities, Capital Securities represented by such Global Capital Security shall be reduced and an adjustment shall be made on the books and records of the Property Trustee (if it is then the custodian for such Global Capital Security) with respect to such Global Capital Security, by the Property Trustee to reflect such reduction. (h) Obligations with Respect to Transfers and Exchanges of Capital Securities. (i) To permit registrations of transfers and exchanges, the Trust shall execute and the Property Trustee shall authenticate Definitive Capital Securities and Global Capital Securities at the Registrar's or co-Registrar's request in accordance with the terms of this Declaration. (ii) Registrations of transfers or exchanges will be effected without charge, but only upon payment (with such indemnity as the Trust or the Sponsor may require) in respect of any tax or other governmental charge that may be imposed in relation to it. (iii) The Registrar or co-registrar shall not be required to register the transfer of or exchange of (a) Capital Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Capital Securities for redemption and ending at the close of business on the day of such mailing; or (b) any Capital Security so selected for redemption in whole or in part, except the unredeemed portion of any Capital Security being redeemed in part. (iv) Prior to the due presentation for registrations of transfer of any Capital Security, the Trust, the Property Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the person in whose name a Capital Security is registered as the owner of such Capital Security for the purpose of receiving Distributions on such Capital Security (subject to Section 2(c) of Annex I hereto) and for all other purposes whatsoever, and none of the Trust, the Property Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. (v) All Capital Securities issued upon any transfer or exchange pursuant to the terms of this Declaration shall evidence the same security and shall be entitled to the same benefits under this Declaration as the Capital Securities surrendered upon such transfer or exchange. 41 (i) No Obligation of the Property Trustee and Registrar. (i) The Property Trustee shall have no responsibility or obligation to any beneficial owner of a Global Capital Security, a Participant in the Clearing Agency or other Person with respect to the accuracy of the records of the Clearing Agency or its nominee or of any Participant thereof, with respect to any ownership interest in the Capital Securities or with respect to the delivery to any Participant, beneficial owner or other Person (other than the Clearing Agency) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Capital Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Capital Securities shall be given or made only to or upon the order of the registered Holders (which shall be the Clearing Agency or its nominee in the case of a Global Capital Security). The rights of beneficial owners in any Global Capital Security shall be exercised only through the Clearing Agency subject to the applicable rules and procedures of the Clearing Agency. The Property Trustee may conclusively rely and shall be fully protected in relying upon information furnished by the Clearing Agency or any agent thereof with respect to its Participants and any beneficial owners. (ii) The Property Trustee and Registrar shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Declaration or under applicable law with respect to any transfer of any interest in any Capital Security (including any transfers between or among Clearing Agency Participants or beneficial owners in any Global Capital Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Declaration, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 9.3. Book Entry Interests. ----------- Global Capital Securities shall initially be registered on the books and records of the Trust in the name of Cede & Co., the nominee of the Clearing Agency, and no Capital Security Beneficial Owner will receive a Definitive Capital Security representing such Capital Security Beneficial Owner's interests in such Global Capital Securities, except as provided in Sections 7.4 and 9.2. Unless and until fully registered Definitive Capital Securities certificates have been issued to the Capital Security Beneficial Owners pursuant to Sections 7.4 and 9.2: (a) the provisions of this Section 9.3 shall be in full force and effect; (b) the Trust, the Trustees and the Administrators shall be entitled to deal with the Clearing Agency for all purposes of this Declaration (including the payment of Distributions on the Global Capital Securities and receiving approvals, votes or consents hereunder) as the Holder of the Capital Securities and the sole holder of the Global Certificates and shall have no obligation to the Capital Security Beneficial Owners; 42 (c) to the extent that the provisions of this Section 9.3 conflict with any other provisions of this Declaration, the provisions of this Section 9.3 shall control; and (d) the rights of the Capital Security Beneficial Owners shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Capital Security Beneficial Owners and the Clearing Agency and/or the Clearing Agency Participants and the Clearing Agency will receive all Distributions pursuant to the terms of this Declaration and payments of Distributions on the Global Certificates to such Clearing Agency Participants will be made by the Clearing Agency in accordance with its established procedures. DTC will make book entry transfers among the Clearing Agency Participants. SECTION 9.4. Notices to Clearing Agency. ----------- Whenever a notice or other communication to the Capital Security Holders is required under this Declaration, the Trustees and the Administrators shall give all such notices and communications specified herein to be given to the Holders of Global Capital Securities to the Clearing Agency, and shall have no notice obligations to the Capital Security Beneficial Owners. SECTION 9.5. Appointment of Successor Clearing Agency. ----------- If any Clearing Agency elects to discontinue its services as securities depositary with respect to the Capital Securities, the Administrators may, in their sole discretion, appoint a successor Clearing Agency with respect to such Capital Securities. ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 10.1. Liability. ------------ (a) Except as expressly set forth in this Declaration, the Securities Guarantees and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders of the Securities which shall be made solely from assets of the Trust; and (ii) required to pay to the Trust or to any Holder of Securities any deficit upon dissolution of the Trust or otherwise. (b) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Common Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of 43 Delaware; provided, however, that the Sponsor shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Capital Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. SECTION 10.2. Exculpation. ------------ (a) Except as otherwise specifically provided in this Declaration, no Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's gross negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and, if selected by such Indemnified Person, has been selected by such Indemnified Person with reasonable care on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. SECTION 10.3. Fiduciary Duty. ------------ (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Property Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person. (b) Unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between any Covered Person and any Indemnified Person; or 44 (ii) whenever this Declaration or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any Holder of Securities, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise. (c) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. SECTION 10.4. Indemnification. ------------ (a) (i) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorney's fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment 45 in its favor by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorney's fees and expenses) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the fullest extent permitted by law, against expenses (including attorney's fees) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification under paragraphs (i) and (ii) of this Section 10.4(a) (unless ordered by a court) shall be made by the Sponsor only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (1) by the Administrators by a majority vote of a Quorum consisting of such Administrators who were not parties to such action, suit or proceeding, (2) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion, or (3) by the Common Security Holder of the Trust. (v) Expenses (including attorney's fees and expenses) incurred by a Company Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a) shall be paid by the Sponsor in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Sponsor as authorized in this Section 10.4(a). Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (i) by the Administrators by a majority vote of a Quorum of disinterested Administrators, (ii) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion or (iii) the Common Security Holder of the Trust, that, based upon the facts known to the Administrators, counsel or the Common Security Holder at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Company Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Administrators, independent 46 legal counsel or Common Security Holder reasonably determine that such person deliberately breached his duty to the Trust or its Common or Capital Security Holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 10.4(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Sponsor or Capital Security Holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 10.4(a) shall be deemed to be provided by a contract between the Sponsor and each Company Indemnified Person who serves in such capacity at any time while this Section 10.4(a) is in effect. Any repeal or modification of this Section 10.4(a) shall not affect any rights or obligations then existing. (vii) The Sponsor or the Trust may purchase and maintain insurance on behalf of any person who is or was a Company Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Sponsor would have the power to indemnify him against such liability under the provisions of this Section 10.4(a). (viii) For purposes of this Section 10.4(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 10.4(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 10.4(a), unless otherwise provided when authorized or ratified, shall continue as to a person who has ceased to be a Company Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a person. (b) To the fullest extent permitted by law, the Sponsor agrees to indemnify the (i) Property Trustee, (ii) the Delaware Trustee, (iii) any Affiliate of the Property Trustee and the Delaware Trustee, and (iv) any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Property Trustee and the Delaware Trustee (each of the Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any and all loss, liability, damage, claim or expense including taxes (other than taxes based on the income of such Fiduciary Indemnified Person) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its 47 powers or duties hereunder. The obligation to indemnify as set forth in this Section 10.4(b) shall survive the dissolution of the Trust and the termination and discharge of this Declaration. SECTION 10.5. Outside Businesses. ------------ Any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee (subject to Section 5.3(c)), may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. No Covered Person, the Sponsor, the Delaware Trustee or the Property Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Property Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. SECTION 10.6. Compensation; Fees. ------------ The Sponsor agrees: (a) to pay to the Trustees and the Administrators from time to time such compensation for all services rendered by them hereunder as the parties shall agree from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) except as otherwise expressly provided herein, to reimburse the Trustees and the Administrators upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees or the Administrators in accordance with any provision of this Declaration (including the reasonable compensation and the expenses and disbursements of their respective agents and counsel), except any such expense, disbursement or advance as may be attributable to their respective negligence or bad faith. The provisions of this Section 10.6 shall survive the dissolution of the Trust and the termination of this Declaration and the removal or resignation of any Trustee or Administrator. No Trustee may claim any lien or charge on any property of the Trust as a result of any amount due pursuant to this Section 10.6. 48 ARTICLE XI ACCOUNTING SECTION 11.1. Fiscal Year. ------------ The fiscal year ("Fiscal Year") of the Trust shall end on December 31 of each year, or such other year as is required by the Code. SECTION 11.2. Certain Accounting Matters. ------------ (a) At all times during the existence of the Trust, the Administrators shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail, each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States federal income tax purposes. The books of account and the records of the Trust shall be examined by and reported upon as of the end of each Fiscal Year of the Trust by a firm of independent certified public accountants selected by the Administrators. (b) The Administrators shall cause to be prepared and delivered to each of the Holders, within 90 days after the end of each Fiscal Year of the Trust, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss; (c) The Administrators shall cause to be duly prepared and delivered to each of the Holders, any annual United States federal income tax information statement required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Administrators shall endeavor to deliver all such information statements within 30 days after the end of each Fiscal Year of the Trust. (d) The Administrators shall cause to be duly prepared and filed with the appropriate taxing authority, an annual United States federal income tax return, on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Administrators on behalf of the Trust with any state or local taxing authority. SECTION 11.3. Banking. ------------ The Trust shall maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Property Trustee shall be made directly to the Property Trustee Account provided that such funds need not be segregated from other funds except to the extent required by mandatory provisions of law. The sole signatories for such accounts shall 49 be designated by the Administrators; provided, however, that the Property Trustee shall designate the signatories for the Property Trustee Account. SECTION 11.4. Withholding. ------------ The Trust and the Administrators shall comply with all withholding requirements under United States federal, state and local law. The Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Trust to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Administrators shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any authority with respect to Distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution in the amount of the withholding to the Holder. In the event of any claimed over withholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1. Amendments. ------------ (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by: (i) the Administrators (or if there are more than two Administrators a majority of the Administrators); (ii) the Property Trustee; (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee; and (iv) the Sponsor. (b) No amendment shall be made, and any such purported amendment shall be void and ineffective: (i) unless, the Property Trustee shall have first received an Officer's Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and 50 (ii) unless the Property Trustee shall have received an Opinion of Counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities), provided, however, that the Property Trustee and the Delaware Trustee (to the extent the Delaware Trustee is required to sign such amendment) shall not be required to sign any such amendment which affects the rights, powers, duties, obligations or immunities of the Property Trustee or the Delaware Trustee, as the case may be, under the Declaration or otherwise; and (iii) to the extent the result of such amendment would be to: (A) cause the Trust to fail to continue to be classified for purposes of United States federal income taxation as a grantor trust; (B) reduce or otherwise adversely affect the powers of the Property Trustee in contravention of the Trust Indenture Act; (C) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act; or (D) result in the Holders recognizing gain or loss for federal income tax purposes. (c) At such time after the Trust has issued any Securities, any amendment that would adversely affect, in any material respect, the rights, privileges or preferences of any Holder of Securities may be effected only as set forth in the terms of such Securities; (d) Sections 9.1(b), 9.1(c) and this Section 12.1 shall not be amended without the consent of all of the Holders of the Securities; (e) Article Four shall not be amended without the consent of the Holders of a Majority in liquidation amount of the Common Securities; (f) The rights of the holders of the Common Securities under Article Five to increase or decrease the number of, and appoint and remove Trustees and Administrators shall not be amended without the consent of the Holders of a Majority in liquidation amount of the Common Securities; and (g) Notwithstanding Section 12.1(c), this Declaration may be amended without the consent of the Holders of the Securities to: (i) cure any ambiguity, correct or supplement any provision in this Declaration that may be inconsistent with any other provision of this Declaration or to make any other provisions with respect to matters or questions arising under this Declaration which shall not be inconsistent with the other provisions of the Declaration; or 51 (ii) modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act; provided, however, that in the case of clause (i), such action shall not adversely affect in any material respect the interest of the Holders of the Securities. (h) This Declaration may be amended by the Trustees, the Administrators and the Sponsor if: (i) the Holders of a Majority in liquidation amount of the Securities consent to such amendment; and (ii) the Trustees and Administrators have received an opinion of nationally recognized independent counsel experienced in such matters to the effect that such amendment or the exercise of any power granted to the Trustees or Administrators in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status as an Investment Company under the Investment Company Act, provided, that without the consent of each Holder of Securities, this Declaration may not be amended to: (x) change the amount or timing of any Distribution on the Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Securities as of a specified date; or. (y) restrict the right of a Holder of Securities to institute suit for the enforcement of any such payment on or after such date. SECTION 12.2. Meetings of the Holders; Action by Written Consent. ------------ (a) Meetings of the Holders of any class of Securities may be called at any time by the Administrators (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading. The Administrators shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 10% in liquidation amount of such class of Securities. Such direction shall be given by delivering to the Administrators one or more notices in a writing stating that the signing Holders of Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders calling a meeting shall specify in writing the Securities held by the Holders exercising the right to call a meeting and only those Securities specified shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. 52 (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders of Securities: (i) notice of any such meeting shall be given to all the Holders of Securities having a right to vote thereat at least seven days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders is permitted or required under this Declaration or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders. Any action that may be taken at a meeting of the Holders of Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of Securities owning not less than the minimum amount of Securities in liquidation amount that would be necessary to authorize or take such action at a meeting at which all Holders having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders entitled to vote who have not consented in writing. The Administrators may specify that any written ballot submitted to the Security Holder for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrators; (ii) each Holder may authorize any Person to act for it by proxy on all matters in which a Holder is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of Securities executing it. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders were stockholders of a Delaware corporation; (iii) each meeting of the Holders shall be conducted by the Administrators or by such other Person that the Administrators may designate; and (iv) unless the Business Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Capital Securities are then listed or trading otherwise provides, the Administrators, in their sole discretion, shall establish all other provisions relating to meetings of Holders, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of Securities, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. 53 ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1. Representations and Warranties of Property Trustee. ------------ The Trustee that acts as initial Property Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Property Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Property Trustee's acceptance of its appointment as Property Trustee (with appropriate changes to clause (a) below) that: (a) The Property Trustee is a Massachusetts banking corporation with trust powers and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) The execution, delivery and performance by the Property Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Property Trustee. This Declaration has been duly executed and delivered by the Property Trustee and constitutes a legal, valid and binding obligation of the Property Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) The execution, delivery and performance of this Declaration by the Property Trustee does not conflict with or constitute a breach of the charter or by-laws of the Property Trustee; and (d) No consent, approval or authorization of, or registration with or notice to, any Massachusetts or federal banking authority is required for the execution, delivery or performance by the Property Trustee of this Declaration. SECTION 13.2. Representations and Warranties of Delaware Trustee. ------------ The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) The Delaware Trustee is a Delaware banking corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; 54 (b) The execution, delivery and performance by the Delaware Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Delaware Trustee. This Declaration has been duly executed and delivered by the Delaware Trustee and constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) No consent, approval or authorization of, or registration with or notice to, any federal banking authority is required for the execution, delivery or performance by the Delaware Trustee of this Declaration; and (d) The Delaware Trustee is a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has its principal place of business in the State of Delaware. ARTICLE XIV MISCELLANEOUS SECTION 14.1. Notices. ------------ All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) if given to the Trust, in care of the Administrators at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Holders and the Property Trustee): LIFE Financial Capital Trust c/o LIFE Financial Corporation 10540 North Magnolia Avenue, Unit B Riverside, California 92505 Attention: Chief Executive Officer (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as Delaware Trustee may give notice of to the Holders): Delaware Trust Capital Management 3 Beaver Valley Road, FC 5-4-2-6 Wilmington, Delaware 19803 Facsimile: (302) 421-7387 Attention: Corporate Trust Administration 55 (c) if given to the Property Trustee, at the Property Trustee's mailing address set forth below (or such other address as the Property Trustee may give notice of to the Holders): State Street Bank and Trust Company Two International Place Boston, Massachusetts 02110 Attention: Corporate Trust Department Facsimile: (617) 644-5372 (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice to the Trust and the Property Trustee): LIFE Financial Corporation 10540 North Magnolia Avenue, Unit B Riverside, California 92505 Attention: Chief Executive Officer (e) if given to any other Holder, at the address set forth on the books and records of the Trust. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 14.2. Governing Law. ------------ This Declaration and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws of the State of Delaware or any other jurisdiction that would call for the application of the law of any jurisdiction other than the State of Delaware; provided, however, that there shall not be applicable to the parties hereunder or this Declaration any provision of the laws (statutory or common) of the State of Delaware (other than the Business Trust Act) pertaining to trusts that relate to or regulate, in a manner inconsistent with the terms hereof (A) the filing with any court or governmental body or agency of Trustee accounts or schedules of Trustee fees and charges, (B) affirmative requirements to post bonds for Trustees, officers, agents or employees of a trust, (C) the necessity for obtaining court or other governmental approval concerning the acquisition, holding or disposition of real or personal property, (D) fees or other sums payable to Trustees, officers, agents or employees of a trust, (E) the allocation of receipts and expenditures to income or principal, (F) restrictions or limitations on the permissible nature, amount or concentration of trust investments or requirements relating to the titling, storage or other manner of holding or investing Trust assets or (G) the establishment of fiduciary or other standards of responsibility or limitations on the acts or powers of trustees that are inconsistent with the 56 limitations or liabilities or authorities and powers of the Trustees hereunder as set forth or referenced in this Declaration. Section 3540 of Title 12 of the Delaware Code shall not apply to the Trust. SECTION 14.3. Intention of the Parties. ------------ It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties. The parties hereto agree, and any Holder by the purchase of a Trust Security shall be deemed to have agreed, to treat in all tax and accounting filings and reports (i) the Trust as a grantor trust and (ii) the Debentures as indebtedness. SECTION 14.4. Headings. ------------ Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 14.5. Successors and Assigns. ------------ Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor, the Trustees and the Administrators shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. SECTION 14.6. Partial Enforceability. ------------ If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. SECTION 14.7. Counterparts. ------------ This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of the Sponsor, each of the Trustees and each of the Administrators to one of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 57 IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. ____________________________________________________ Daniel L. Perl, in his capacity as Administrator ____________________________________________________ L. Bruce Mills, Jr., in his capacity as Administrator Delaware Trust Capital Management as Delaware Trustee By: _______________________________________________ Authorized Signatory State Street Bank and Trust Company, as Property Trustee By: _______________________________________________ LIFE Financial Corporation, as Sponsor By: _______________________________________________ Daniel L. Perl President and Chief Executive Officer __________________________________ ___________, solely to acknowledge the restatement and amendment of the Original Declaration and his removal from his position as Initial Trustee pursuant to Section 5.1(c). 58 ANNEX I TERMS OF ____% CONVERTIBLE TRUST PREFERRED SECURITIES ___% CONVERTIBLE TRUST COMMON SECURITIES Pursuant to Section 7.1 of the Amended and Restated Declaration of Trust, dated as of ________________, 1997 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Securities are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration or, if not defined in such Declaration, as defined in the Prospectus): 1. Designation and Number. (a) Capital Securities. ____________ ___% Convertible Trust Preferred ------------------ Securities of the Trust, with an aggregate liquidation amount with respect to the assets of the Trust of ________ Million dollars ($___________), and each with a liquidation amount with respect to the assets of the Trust of $__ per Security, are hereby designated for the purposes of identification only as "____% Convertible Trust Preferred Securities" (the "Capital Securities"). The certificates evidencing the Capital Securities shall be substantially in the form of Exhibit A-1 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any stock exchange on which the Capital Securities are listed. (b) Common Securities. _________ ___% Convertible Trust Common ----------------- Securities of the Trust with an aggregate liquidation amount with respect to the assets of the Trust of _____________________ dollars ($____________) and a liquidation amount with respect to the assets of the Trust of $__ per Security, are hereby designated for the purposes of identification only as "Common Securities" (the "Common Securities"). The certificates evidencing the Common Securities shall be substantially in the form of Exhibit B-1 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. 2. Distributions. (a) Distributions payable on each Security will be fixed at a rate per annum of ____% (the "Coupon Rate") of the liquidation amount of $___ per Security (the "Liquidation Amount"), such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one quarterly period will bear additional distributions thereon compounded quarterly at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions", as used herein, includes distributions of any such interest, including any Additional Interest and Compounded Interest (each as defined in the Indenture) unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds on hand legally available therefor. 59 (b) Distributions on the Securities will be cumulative, will accumulate from the most recent date to which Distributions have been paid or duly provided for or, if no Distributions have been paid or duly provided for, from __________, 1997, and will be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on March 15, 1998 (each, a "Distribution Date"), except as otherwise described below. Distributions will be computed on the basis of a 360-day year consisting of twelve 30-day months and for any period less than a full calendar month on the basis of the actual number of days elapsed in such 30-day month. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 20 consecutive quarters, including the first such quarter during such period (each an "Extension Period"), during which Extension Period no interest shall be due and payable on the Debentures, provided that no Extension Period shall end on a day other than an interest payment date for the Debentures or shall extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Despite such deferral, Distributions will continue to accumulate with additional Distributions thereon (to the extent permitted by applicable law but not at a rate greater than the rate at which interest is then accruing on the Debentures) at the Coupon Rate compounded quarterly during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 20 consecutive quarters, including the first quarter during such Extension Period, or extend beyond the Maturity Date of the Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. (c) Distributions on the Securities will be payable to the Holders thereof as they appear on the books and records of the Trust on the fifteenth day of the month in which the relevant Distribution Date occurs, which Distribution Dates correspond to the interest payment dates on the Debentures. Subject to any applicable laws and regulations and the provisions of the Declaration, each such payment in respect of the Capital Securities will be made as follows: (i) if the Capital Securities are held in global form by a Clearing Agency (or its nominee), in accordance with the procedures of the Clearing Agency, and (ii) if the Capital Securities are held in definitive form, by check mailed to the address of the holder thereof entitled thereto as reflected in the records of the Registrar, unless otherwise agreed by the Trust. The relevant record dates for the Common Securities shall be the same as the record dates for the Capital Securities. Distributions payable on any Securities that are not punctually paid on any Distribution Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, will cease to be payable to the Holder on the relevant record date, and such defaulted Distribution will instead be payable to the Person in whose name such Securities are registered on the special record date or other specified date determined in accordance with the Indenture. If any date on which Distributions are payable on the Securities is not a Business Day, then payment of the Distribution payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that if such next succeeding Business Day falls in the next 60 succeeding calendar year, such payment shall be made on the immediately- preceding Business Day, with the same force and effect as if made on such date. (d) In the event of an election by a Holder to exchange its Securities through the Conversion Agent for Debentures and convert such Debentures into Common Stock pursuant to the terms of the Securities as set forth in this Annex I to the Declaration, accrued Distributions will not be paid on Securities that are converted, nor will any payment, allowance or adjustment be made for accumulated and unpaid Distributions on such Securities, whether or not in arrears, on converted Securities except under the limited circumstances described in paragraph 5(b) and except that if any Security is converted on or after a record date for payment of Distributions thereon, the Holder of Securities at the close of business on any record date for the payment of Distributions will be entitled to receive the Distribution payable on such Securities on the corresponding payment date notwithstanding the conversion of such Securities into Common Stock following such record date. (e) In the event that there is any money or other property held by or for the Trust on a Distribution Date that is not accounted for hereunder, such property shall be distributed Pro Rata (as defined herein) among the Holders of the Securities. 3. Liquidation Distribution Upon Dissolution. In the event of any dissolution of the Trust or the Holders of the Common Securities otherwise give notice of their election to dissolve the Trust pursuant to and in compliance with the provisions of Section 8.1(a)(iii) of the Declaration, the Trust shall be liquidated by the Administrators as expeditiously as practicable by distributing, after paying or making reasonable provision to pay all claims and obligations of the Trust in accordance with Section 3808(e) of the Business Trust Act, to the Holders a Like Amount (as defined below) of the Debentures, unless such distribution is determined by the Property Trustee not to be practicable, in which event such Holders will be entitled to receive out of the assets of the Trust legally available for distribution to Holders, after paying or making reasonable provision to pay all claims and obligations of the Trust in accordance with Section 3808(e) of the Business Trust Act, an amount equal to the aggregate of the liquidation amount of $___ per Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). "Like Amount" means (i) with respect to a redemption of the Securities, Securities having a Liquidation Amount equal to the principal amount of Debentures to be paid in accordance with their terms and (ii) with respect to a distribution of Debentures upon the liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Securities of the Holder to whom such Debentures are distributed. If, upon any such liquidation, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets on hand legally available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Capital Securities shall be paid on a Pro Rata basis. 61 4. Redemption and Distribution. (a) Upon the repayment of the Debentures in whole or in part, at maturity or upon prepayment (either at the option of the Debenture Issuer or pursuant to a Special Event, as described below), the proceeds from such repayment shall be simultaneously applied by the Property Trustee (subject to the Property Trustee having received notice no later than 45 days prior to such repayment) to redeem a Like Amount of the Securities at a redemption price equal to (i) in the case of the repayment of the Debentures at maturity, the Maturity Redemption Price (as defined below), (ii) in the case of the optional prepayment of the Debentures upon the occurrence and continuation of a Special Event, the Special Event Redemption Price (as defined below) and (iii) in the case of the optional prepayment of the Debentures other than as a result of the occurrence and continuance of a Special Event, the Optional Redemption Price (as defined below). The Maturity Redemption Price, the Special Event Redemption Price and the Optional Redemption Price are referred to collectively as the "Redemption Price". Holders will be given not less than 30 nor more than 60 days notice of such redemption. (b) (i) The "Maturity Redemption Price", with respect to a redemption of Securities, shall mean an amount equal to the principal of and accrued and unpaid interest on the Debentures as of the maturity date thereof. (ii) In the case of an optional redemption, if fewer than all the outstanding Securities are to be so redeemed, the Securities will be redeemed Pro Rata and the Capital Securities to be redeemed will be determined as described in Section 4(f)(ii) below. Upon the entry of an order for the dissolution of the Trust by a court of competent jurisdiction, the Debentures thereafter will be subject to optional repayment, in whole, but not in part, on or after ____________, ____ (the "Initial Optional Redemption Date"). The Debenture Issuer shall have the right (subject to the conditions in the Indenture) to elect to prepay the Debentures in whole or in part at any time on or after the Initial Optional Redemption Date, upon not less than 30 days and not more than 60 days notice, at the Optional Redemption Price and, simultaneous with such prepayment, to cause a Like Amount of the Securities to be redeemed by the Trust at the Optional Redemption Price on a Pro Rata basis. "Optional Redemption Price" shall mean a price equal to 100% of the liquidation amount of Debentures to be prepaid plus accumulated and unpaid interest thereon, if any, to the date of such prepayment. (c) If at any time a Tax Event, a Regulatory Capital Event or an Investment Company Event (each as defined below, and each a "Special Event") occurs, the Debenture Issuer shall have the right (subject to the conditions set forth in the Indenture) at any time, upon not less than 30 nor more than 60 days notice, to prepay the Debentures in whole, but not in part, within the 90 days following the occurrence of such Special Event (the "90 Day Period"), and, simultaneous with such prepayment, to cause a Like Amount of the Securities to be redeemed by the Trust at the Special Event Redemption Price on a Pro Rata basis. 62 A "Tax Event" means (a) the receipt by the Debenture Issuer and the Trust of an opinion of Muldoon, Murphy & Faucette or any other nationally recognized tax counsel experienced in such matters, to the effect that as a result of (i) any amendment to, clarification of, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, (ii) any amendment to, clarification of, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination or the publication of an explanation of legislation by the staff of the Joint Committee on Taxation), (iii) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (iv) any judicial decision, administrative pronouncement, ruling, regulatory procedure, notice, announcement (including any notice or announcement of intent to adopt procedures or regulations) or any other actions taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case, on or after the Issue Date, there is more than an insubstantial risk that (x) within 90 days the Trust is or will be subject to United States federal income tax with respect to income received or accrued on the Debentures, (y) interest payable by the Debenture Issuer on the Debentures is not or will not be deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes, or (z) within 90 days the Trust is or will be subject to more than a de minimis amount of other taxes, duties or other governmental charges, or (b) a proposed audit adjustment by a taxing authority which, if sustained, would result in any of the events described in clauses (x), (y) or (z) above. A "Regulatory Capital Event" means the receipt by the Debenture Issuer and the Trust of an opinion of Muldoon, Murphy & Faucette or any other independent bank regulatory counsel experienced in such matters, to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any rules, guidelines or policies of the Office of Thrift Supervision, the Board of Governors of the Federal Reserve System (the "Federal Reserve") or any other federal bank regulatory agency or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the Issue Date, (i) the Debenture Issuer is or within 90 days will be subject to capital adequacy requirements and such requirements do not or will not permit the Capital Securities to constitute, subject to limitations on inclusion of the Capital Securities as Tier 1 capital by the Federal Reserve capital guidelines in effect as of the date of the Prospectus relating to the Subscription Offering, Tier 1 capital (or its then- equivalent) or (ii) the amount of net proceeds received from the sale of the Capital Securities and contributed by the Debenture Issuer to its subsidiary, Life Bank, does not or within 90 days will not constitute Tier 1 (core) capital (or its then-equivalent). An "Investment Company Event" means the receipt by the Debenture Issuer and the Trust of an opinion of Muldoon, Murphy & Faucette or any other nationally recognized counsel experienced in such matters, to the effect that (a) as a result of any amendment to, or change 63 (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or authority thereof or therein or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the Issue Date, there is more than an insubstantial risk that the Trust is or within 90 days will be considered an Investment Company that is required to be registered under the Investment Company Act. "Special Event Redemption Price" shall mean, with respect to a redemption of Securities, a price equal to 100% of the principal of a Like Amount of Debentures to be prepaid plus accumulated and unpaid interest thereon, if any, to the date of such prepayment. (d) On and from the date fixed by the Administrators for any distribution of Debentures and liquidation of the Trust: (i) the Securities will no longer be deemed to be outstanding and (ii) the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee), as the Holder of the Capital Securities, will receive a registered global certificate or certificates representing the Debentures to be delivered upon such distribution and any certificates representing Securities not held by the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee) will be deemed to represent beneficial interests in a Like Amount of Debentures until such certificates are presented to the Debenture Issuer or its agent for transfer or reissue. (e) The Trust may not redeem fewer than all the outstanding Securities unless all accumulated and unpaid Distributions have been paid on all Securities for all quarterly Distribution periods terminating on or before the date of redemption. (f) The procedure with respect to redemptions of, or distributions of Debentures in exchange for, the Securities, shall be as follows: (i) Notice of any redemption of, or notice of distribution of Debentures in exchange for, the Securities (a "Redemption/Distribution Notice") will be given by the Trust by mail to each Holder to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for prepayment of the Debentures. The Redemption/Distribution Notice shall identify the Securities to be redeemed or exchanged and shall state: (A) the redemption/distribution date; (B) the Redemption Price; provided, however, if the Redemption Price is not known at the time the Redemption/Distribution Notice is sent, such notice shall set forth the manner of calculation thereof; (C) the name and address of the Paying Agent; (D) that Securities called for redemption or exchange must be surrendered to the Paying Agent to collect the Redemption Price; 64 (E) if fewer than all of the outstanding Securities are to redeemed or exchanged, the identification and amounts of the particular Securities to be redeemed or exchanged, as the case may be; (F) in case any Security is to be redeemed or exchanged in part only, the portion of the principal amount to be redeemed or exchanged, and that on and after the date fixed for exchange or redemption, upon surrender of such Security, a new Security or Securities in principal amount equal to the portion thereof not redeemed or exchanged shall be issued; (G) that, unless the Debenture Issuer defaults in paying the Redemption Price, any distributions on the Securities called for redemption will cease to accrue on and after such redemption date; and (H) the CUSIP number, if any, of the Securities called for redemption or exchange. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(f)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders. Each Redemption/Distribution Notice shall be addressed to the Holders of Securities at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Securities are to be redeemed, the Securities to be redeemed shall be redeemed Pro Rata from each Holder of Securities, it being understood that, in respect of Capital Securities registered in the name of and held of record by the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee), the distribution of the proceeds of such redemption will be made to the Clearing Agency and disbursed by such Clearing Agency in accordance with the procedures applied by such agency or nominee. (iii) If Securities are to be redeemed and the Trust gives a Redemption/Distribution Notice, (which notice will be irrevocable), then (A) with respect to Capital Securities issued in book-entry form, by 12:00 noon, Eastern time, on the redemption date, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the related prepayment or maturity of the Debentures by 10:00 a.m., Eastern time, on the maturity date or the date of prepayment, as the case requires, the Property Trustee will deposit irrevocably with the Clearing Agency or its nominee (or successor Clearing Agency or its nominee) funds sufficient to pay the applicable Redemption Price with respect to such Capital Securities, and (B) with respect to Capital Securities issued in certificated form and Common Securities, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the related prepayment or maturity of the Debentures, the Property Trustee will pay the relevant Redemption Price to the Holders of such Securities against presentation to the Paying Agent of the 65 certificates therefor. If a Redemption/Distribution Notice shall have been given and funds deposited as required, if applicable, then immediately prior to the close of business on the date of such deposit, or on the redemption date, as applicable, Distributions will cease to accumulate on the Securities so called for redemption and all rights of Holders so called for redemption will cease, except the right of the Holders of such Securities to receive the Redemption Price, but without interest on such Redemption Price, and such Securities shall cease to be outstanding. (iv) Payment of accumulated and unpaid Distributions on the Redemption Date of the Securities will be subject to the rights of Holders of Securities on the close of business on a regular record date in respect of a Distribution Date occurring on or prior to such Redemption Date. Neither the Administrators nor the Trust shall be required to register or cause to be registered the transfer of (i) any Securities beginning on the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Securities for redemption or (ii) any Securities selected for redemption except the unredeemed portion of any Security being redeemed. If any date fixed for redemption of Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Property Trustee or by the Sponsor as guarantor pursuant to the relevant Securities Guarantee, Distributions on such Securities will continue to accumulate from the original redemption date to the actual date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. (v) Redemption/Distribution Notices shall be sent by the Property Trustee on behalf of the Trust to (A) in respect of the Capital Securities, the Clearing Agency or its nominee (or any successor Clearing Agency or its nominee) if the Global Certificates have been issued or, if Definitive Capital Security Certificates have been issued, to the Holder thereof, and (B) in respect of the Common Securities, to the Holder thereof. (vi) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws and banking laws), provided the acquiror is not the Holder of the Common Securities or the obligor under the Indenture, the Sponsor or any of its subsidiaries may at any time and from time to time purchase outstanding Capital Securities by tender, in the open market or by private agreement. 5. Conversion Rights. Holders of Securities shall have the right at any time prior to 5:00 p.m. (Eastern time) on the earlier of (i) the Business Day immediately preceding the date of repayment of such Securities, whether at maturity or upon redemption, and (ii) the Conversion Termination Date, if any, to cause the Conversion Agent to exchange Securities, on behalf of the converting Holders, for Debentures, 66 which Debentures will be converted into shares of Common Stock in the manner described herein on and subject to the following terms and conditions: (a) The Securities will be exchangeable for Debentures which will be convertible at the office of the Conversion Agent into fully paid and nonassessable shares of Common Stock pursuant to the Holder's direction to the Conversion Agent to exchange such Securities for a portion of the Debentures theretofore held by the Trust on the basis of one Security per $__ principal amount of Debentures, and immediately convert such amount of Debentures into fully paid and nonassessable shares of Common Stock at a conversion rate of ________ shares of Common stock for each Debenture, subject to certain adjustments set forth in the terms of the Debentures (as so adjusted, the "Conversion Price"). (b) To exchange the Securities for Debentures and to convert the Debentures into Common Stock, the Holder shall submit to the Conversion Agent at the office designated therefor an irrevocable request to convert Securities on behalf of such Holder (the "Conversion Request"), together, if the Securities are in certificated form, with such certificates. The Conversion Request shall (i) set forth the number of Securities to be exchanged and the name or names, if other than the Holder, in which the shares of Common Stock should be issued and (ii) direct the Conversion Agent (A) to exchange such Securities for a portion of the Debentures held by the Trust (at the rate of exchange specified in the preceding paragraph) and (B) to immediately convert such Debentures on behalf of such Holder, into Common Stock (at the Conversion Price specified in the preceding paragraph). The Conversion Agent shall notify the Trust of the Holder's election to exchange Securities for a portion of the Debentures held by the Trust and the Trust shall, upon receipt of such notice, deliver to the Conversion Agent the appropriate principal amount of Debentures for exchange in accordance with this Section 5. The Conversion Agent shall thereupon notify the Debenture Issuer of the Holder's election to convert such Debentures into shares of Common Stock. Holders of Securities at 5:00 p.m. (Eastern time) on a record date for a Distribution Date will be entitled to receive the Distribution payable on such Securities on the corresponding Distribution Date notwithstanding the conversion of such Securities following such record date but on or prior to such Distribution Date. Except as provided in the immediately preceding sentence, neither the Trust nor the Debenture Issuer will make, or be required to make, any payment, allowance or adjustment for accumulated and unpaid Distributions, whether or not in arrears, on converted Securities; provided, however, that if notice of redemption of Securities is mailed or otherwise given to Holders of Securities or the Trust issues a press release announcing a Conversion Termination Date, then, if any Holder of Securities converts any Securities into Common Stock on any date on or after the date on which such notice of redemption is mailed or otherwise given or the date of such press release, as the case may be, and if such Conversion Date falls on any day from and including the first day of an Extension Period and on or prior to the Distribution Date upon which such Extension Period ends, such converting holder shall be entitled to receive either (i) if the Conversion Date falls after a record date and on or prior to the next succeeding Distribution Date, all accrued and unpaid Distributions on such Securities (including interest thereon, if any, to the extent permitted by applicable law) to such Distribution Date or (ii) if the Conversion Date does not fall on a date described in clause (i) above, all accrued and unpaid Distributions on such Securities (including interest thereon, if any, to the extent permitted by applicable law) to the most recent 67 Distribution Date prior to the Conversion Date, which Distributions shall, in either such case, be paid to such converting holder unless the Conversion Date of such Securities is on or prior to the Distribution Date upon which such Extension Period ends and after the record date for such Distribution Date, in which case such Distributions shall be paid to the Person who was the Holder of such Securities (or one or more predecessor Securities) at 5:00 p.m. (Eastern time) on such record date. The Debenture Issuer shall make no payment or allowance for distributions on the shares of Common Stock issued upon such conversion, except to the extent that such shares of Common Stock are held of record on the record date for any such distributions. Securities shall be deemed to have been converted immediately prior to 5:00 p.m. (Eastern time) on the day on which a Conversion Request relating to such Securities is received by the Trust in accordance with the foregoing provision (the "Conversion Date"). The Person or Persons entitled to receive Common Stock issuable upon conversion of the Debentures shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the Conversion Date, the Debenture Issuer shall issue and deliver at the office of the Conversion Agent a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion, together with the cash payment, if any, in lieu of any fraction of any share to the Person or Persons entitled to receive the same, unless otherwise directed by the Holder in the notice of conversion and the Conversion Agent shall distribute such certificate or certificates to such Person or Persons. (c) Each Holder of a Security by his acceptance thereof appoints State Street Bank and Trust (the "Conversion Agent") for the purpose of effecting the exchange of Securities and conversion of Debentures in accordance with this Section 5. In effecting the exchange, conversion and transactions described in this Section 5, the Conversion Agent shall be acting as agent of the Holders of Securities directing it to effect such transactions. The Conversion Agent is hereby authorized (i) to exchange Securities from time to time for Debentures held by the Trust in connection with the conversion of such Securities in accordance with this Section 5 and (ii) to convert all or a portion of the Debentures into Common Stock and thereupon to deliver such shares of Common Stock in accordance with the provisions of this Section 5 and to deliver to the Trust a new Debenture or Debentures for any resulting unconverted principal amount. So long as any Capital Securities are outstanding, the Trust shall not convert any Securities except pursuant to a Conversion Request delivered to the Conversion Agent by a holder of Capital Securities. (d) No fractional shares of Common Stock will be issued as a result of conversion, but in lieu thereof, such fractional interest will be paid in cash (based on the Closing Price of Common Stock on the Conversion Date) by the Debenture Issuer to the Trust, which in turn will make such payment to the Holder or Holders of Securities so exchanged. (e) The Debenture Issuer shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of the Debentures, free from any preemptive or other similar rights, such number of such shares of Common Stock as shall from time to time be issuable upon the conversion of all the Debentures then outstanding. Notwithstanding the foregoing, the Debenture Issuer shall be entitled to deliver upon conversion of Debentures, shares of Common Stock reacquired and held in the treasury of the Debenture Issuer (in lieu of the issuance of authorized and unissued shares of Common Stock), so 68 long as any such treasury shares are free and clear of all liens, charges, security interests or encumbrances. Any shares of Common Stock issued upon conversion of the Debentures shall be duly authorized, validly issued, fully paid and nonassessable. The Trust shall deliver the shares of Common Stock received upon conversion of the Debentures to the converting Holder free and clear of all liens, charges, security interests and encumbrances, except for United States withholding taxes. Each of the Debenture Issuer and the Trust shall prepare and shall use its best efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all applicable requirements as to registration or qualification of the Common Stock issuable upon conversion of Debentures (and all requirements to list on any national securities exchange or quotation system such Common Stock that are at the time applicable), to enable the Debenture Issuer to lawfully issue Common Stock to the Trust upon conversion of the Debentures and the Trust to lawfully deliver Common Stock to each Holder upon such conversion. (f) The Debenture Issuer shall pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Debentures and the delivery of shares of Common Stock by the Trust to the Holder upon conversion. The Debenture Issuer shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the Securities so converted were registered, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Trust the amount of any such tax or has established to the satisfaction of the Trust that such tax has been paid. (g) Nothing in the preceding Section 5(f) shall limit the requirement of the Trust to withhold taxes pursuant to the terms of the Securities or as set forth in this Annex I to the Declaration or the Declaration itself or otherwise require the Property Trustee or the Trust to pay any amounts on account of such withholdings. (h) (i) On and after _______________, ____ the Debenture Issuer shall have the right, at its option, to cause the conversion rights of holders of the Debentures to convert the Debentures into Common Stock to terminate, in which case the rights of Holders of the Securities to convert the Securities into Common Stock pursuant to this Section 5 will likewise terminate, if (x) the Trust is current in the payment of Distributions on the Securities (except to the extent that the payment of Distributions may have been deferred as the result of an Extension Period) and (y) for at least 20 trading days within any period of 30 consecutive trading days ending on or after ______________, ____ including the last trading day of such period, the Closing Price of the Common Stock on each of such 20 trading days shall have exceeded ___% of the Conversion Price in effect on such trading day. (ii) To exercise its option to cause the conversion rights of Holders of the Securities to terminate, the Debenture Issuer must cause the Trust to issue a press release for publication on the Dow Jones News Service or on a comparable news service (the "Press Release") prior to the opening of business on the second trading day after any period in which the conditions in paragraph 5(h)(i) have been met (which date shall not be prior to ____________, ____), which Press Release shall state that the Debenture Issuer has elected to exercise its right to terminate the 69 conversion rights of holders of Debentures and Holders of Securities, specify the Conversion Termination Date and provide the current Conversion Price of the Securities and the Closing Price of the Capital Securities and the Common Stock, in each case as of the close of business on the trading day next preceding the date of the Press Release. If the Debenture Issuer exercises the option described in this paragraph 5(h), the "Conversion Termination Date" shall be the Business Day selected by the Debenture Issuer which shall not be less than 30 nor more than 60 calendar days after the date on which the Trust issues the Press Release. If the Debenture Issuer does not exercise the option described in this paragraph 5(h), and the Securities are otherwise called for redemption, the Securities will be convertible until 5:00 p.m. (Eastern time) on the Business Day immediately preceding the date of such redemption. (iii) In addition to the Press Release, notice of the termination of conversion rights of Holders of the Securities (a "Notice of Conversion Termination") must be given by the Trust by first-class mail to each Holder of Securities not more than four Business Days after the Trust issues the Press Release. Each such mailed Notice of Conversion Termination shall state: (1) the Conversion Termination Date; (2) the Conversion Price of the Securities and the Closing Price of the Capital Securities and the Common Stock, in each case as of the close of business on the trading day next preceding the date of the Notice of Conversion Termination; (3) that Securities will be convertible until 5:00 p.m. (Eastern time) on the Conversion Termination Date and the place or places at which a conversion notice may be given and Securities (if not in book-entry form) may be surrendered for conversion into shares of Common Stock; and (4) such other information or instructions as the Trust deems necessary or advisable to enable a Holder to exercise its conversion rights hereunder. For purposes of the calculation of the Conversion Termination Date and the dates on which notices are given pursuant to this paragraph 5(h)(iii), a Notice of Conversion Termination shall be deemed to have been given on the day such notice is first mailed by first-class mail, postage prepaid, to each Holder of Securities at the address of such Holder appearing in the books and records of the Trust (whether or not any such Holder receives the Notice of Conversion Termination). No defect in the Notice of Conversion Termination or in the mailing thereof with respect to any Security shall affect the validity of such notice with respect to any other Security. As of 5:00 p.m. (Eastern time) on the Conversion Termination Date, the Securities shall be deemed to be non-convertible securities. (iv) The term "Closing Price" of any security on any day means the last reported sale price of such security, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the NYSE Composite Tape, or, if such security is not listed or admitted to trading on the NYSE, on the principal national securities exchange on which such security is listed or admitted to trading, or, if such security is not listed or admitted to trading on a national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc., or, if such security is not quoted or admitted to trading on such quotation system, on the principal quotation system on which such security may be listed or admitted to trading or quoted, or, if not listed or admitted to trading or quoted on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted 70 reporting service, or, if not so available in such manner, as furnished by any NYSE member firm selected from time to time by the Board of Directors of the Sponsor for that purpose or, if not so available in such manner, as otherwise determined in good faith by the Board of Directors of the Sponsor. 6. Voting Rights - Capital Securities. (a) Except as provided under Sections 6(b) and 8 and as otherwise required by law and the Declaration, the Holders of the Capital Securities will have no voting rights. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on such Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under Section 5.7 of the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of a Majority in liquidation amount of all outstanding Capital Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of the Capital Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Capital Securities except by subsequent vote of such Holders. Subject to Section 2.7 of the Declaration, the Property Trustee shall notify each Holder of Capital Securities of any notice of default with respect to the Debentures. In addition to obtaining the foregoing approvals of such Holders of the Capital Securities, prior to taking any of the foregoing actions, the Trustees shall obtain an opinion of counsel experienced in such matters to the effect that, as a result of such action, the Trust will not be classified as an association taxable as a corporation for United States federal income tax purposes and (ii) the Holders will not recognize gain or loss for federal income tax purposes. If an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or premium, if any, or interest on the Debentures on the due date (or in the case of prepayment, on the prepayment date), then a Holder of Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or premium, if any, or interest on a Like Amount of Debentures (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Common Securities Holder will be subordinated to the rights of such Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of Capital Securities in such Direct Action. Except as provided in the second preceding sentence or as otherwise provided in the Declaration, the Holders of Capital Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. Any approval or direction of Holders of Capital Securities may be given at a separate meeting of Holders of Capital Securities convened for such purpose, at a meeting of all of the Holders of 71 Securities in the Trust or pursuant to written consent. The Administrators will cause a notice of any meeting at which Holders of Capital Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Capital Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Capital Securities will be required for the Trust to redeem and cancel Capital Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. Notwithstanding that Holders of Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if they were not outstanding. 7. Voting Rights - Common Securities. (a) Except as provided under Sections 7(b), 7(c) and 8 as otherwise required by law and the Declaration, the Holders of the Common Securities will have no voting rights. (b) Unless an Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by the holder of the Common Securities. If an Event of Default has occurred and is continuing, the Property Trustee and the Delaware Trustee may be removed at such time by the Holders of a Majority in liquidation amount of the outstanding Capital Securities. In no event will the Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Holders of the Common Securities. No resignation or removal of a Trustee or Administrator and no appointment of a successor trustee or administrator shall be effective until the acceptance of appointment by the successor trustee or administrator in accordance with the provisions of the Declaration. (c) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on such Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under Section 5.7 of the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of a Majority in liquidation amount of all outstanding Common Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of the Common Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Common 72 Securities except by subsequent vote of such Holders. Subject to Section 2.7 of the Declaration, the Property Trustee shall notify each Holder of Common Securities of any notice of default with respect to the Debentures. In addition to obtaining the foregoing approvals of such Holders of the Common Securities, prior to taking any of the foregoing actions, the Trustees shall obtain an opinion of counsel experienced in such matters to the effect that, as a result of such action, the Trust will not be classified as an association taxable as a corporation for United States federal income tax purposes and (ii) the Holders will not recognize gain or loss for federal income tax purposes. If an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or premium, if any, or interest on the Debentures on the due date (or in the case of prepayment, on the prepayment date), then a Holder of Common Securities may institute a Direct Action for enforcement of payment to such Holder of the principal of or premium, if any, or interest on a Like Amount of Debentures on or after the respective due date specified in the Debentures. In connection with any Direct Action, the rights of the Common Securities Holder will be subordinated to the rights of such Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of Common Securities in such Direct Action. Except as provided in the second preceding sentence, the Holders of Common Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. Any approval or direction of Holders of Common Securities may be given at a separate meeting of Holders of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities in the Trust or pursuant to written consent. The Administrators will cause a notice of any meeting at which Holders of Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. 8. Amendments to Declaration. In addition to the requirements set out in Section 12.1 of the Declaration, the Declaration may be amended from time to time by the Sponsor, the Property Trustee and the Administrators, without the consent of the Holders of the Securities (i) to cure any ambiguity, correct or supplement any provisions in the Declaration that may be inconsistent with any other provisions, or to make any other provisions with respect to matters or questions arising under the Declaration which shall not be inconsistent with the other provisions of the Declaration, or (ii) to modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any 73 Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act; provided, however, that in the case of clause (i), such action shall not adversely affect in any material respect the interests of any Holder of Securities, and any such amendments of the Declaration shall become effective when notice thereof is given to the holders of the Securities. The Declaration may be amended by the Trustees, the Administrators and the Sponsor with (i) the consent of Holders representing a Majority in liquidation amount of all outstanding Securities, and (ii) receipt by the Trustees and the Administrators of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees or Administrators in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status as an Investment Company under the Investment Company Act or result in the Holders recognizing gain or loss for federal income tax purposes, provided that, without the consent of each Holder of Securities, the Declaration may not be amended to (i) change the amount or timing of any Distribution on the Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Securities as of a specified date or (ii) restrict the right of a holder of Securities to institute suit for the enforcement of any such payment on or after such date. 9. Pro Rata. A reference in these terms of the Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities outstanding unless, in relation to a payment, an Event of Default under the Declaration has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Capital Securities pro rata according to the aggregate liquidation amount of Capital Securities held by the relevant Holder relative to the aggregate liquidation amount of all Capital Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Capital Securities, to each Holder of Common Securities pro rata according to the aggregate liquidation amount of Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding. In any such proration, the Trust may make such adjustments as may be appropriate in order that only Securities in authorized denominations shall be redeemed. 10. Ranking. The Capital Securities rank pari passu with the Common Securities and payment thereon shall be made Pro Rata with the Common Securities, except that, if an Event of Default under the Declaration occurs and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the Holders of the Capital Securities shall be paid in full the Distributions, Redemption Price, Liquidation Distribution and other payments to which they are entitled at such time. 74 11. Acceptance of Securities Guarantee and Indenture. Each Holder of Capital Securities and Common Securities, by the acceptance thereof, agrees to the provisions of the Capital Securities Guarantee and the Common Securities Guarantee, respectively, including the subordination provisions therein and to the provisions of the Indenture. 12. No Preemptive Rights. The Holders of the Securities shall have no preemptive or similar rights to subscribe for any additional securities. 75 EXHIBIT A-1 FORM OF CONVERTIBLE TRUST PREFERRED SECURITY CERTIFICATE [FORM OF FACE OF SECURITY] [IF THIS GLOBAL SECURITY IS A GLOBAL CONVERTIBLE TRUST PREFERRED SECURITY ("CAPITAL SECURITY"), INSERT: THIS CAPITAL SECURITY IS A GLOBAL CAPITAL SECURITY WITHIN THE MEANING OF THE DECLARATION HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (THE "CLEARING AGENCY") OR A NOMINEE OF THE CLEARING AGENCY. THIS CAPITAL SECURITY IS EXCHANGEABLE FOR CAPITAL SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE CLEARING AGENCY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE DECLARATION AND NO TRANSFER OF THIS CAPITAL SECURITY (OTHER THAN A TRANSFER OF THIS CAPITAL SECURITY AS A WHOLE BY THE CLEARING AGENCY TO A NOMINEE OF THE CLEARING AGENCY OR BY A NOMINEE OF THE CLEARING AGENCY TO THE CLEARING AGENCY OR ANOTHER NOMINEE OF THE CLEARING AGENCY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS CAPITAL SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) TO THE TRUST OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CAPITAL SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] Certificate Number Number of Convertible Trust Preferred Securities CUSIP NO._________________ Certificate Evidencing Convertible Trust Preferred Securities of LIFE Financial Capital Trust ____% Convertible Trust Preferred Securities (liquidation amount $__ per Capital Security) LIFE Financial Capital Trust, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that _____ (the "Holder") is the registered owner of [$_______ in aggregate liquidation amount of Convertible Trust Preferred Securities of the Trust]1 76 [the aggregate liquidation amount of Convertible Trust Preferred Securities of the Trust specified in Schedule A hereto]2 representing undivided beneficial interests in the assets of the Trust designated the ____% Convertible Trust Preferred Securities (liquidation amount $__ per Capital Security) (the "Capital Securities"). The Capital Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of __________, 1997, as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration. Capitalized terms used but not defined herein shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration, the Capital Securities Guarantee and the Indenture to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Capital Securities Guarantee, to the extent provided therein. By its acceptance, the Holder agrees to treat, for United States federal income tax purposes, the Trust as a grantor trust, the Debentures as indebtedness and the Capital Securities as evidence of indirect beneficial ownership in the Debentures. ________ 1 Insert in Definitive Capital Securities only. 2 Insert in Global Capital Securities only. 77 IN WITNESS WHEREOF, the Trust has executed this certificate this day of _________________, 199__. LIFE FINANCIAL CAPITAL TRUST By:_______________________________ Name: Title: Administrator PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Capital Securities referred to in the within-mentioned Declaration. Dated: ______________ __, 1997 State Street Bank and Trust Company, as Property Trustee By:_______________________________ Authorized Signatory 78 [FORM OF REVERSE OF SECURITY] Distributions payable on each Capital Security will be fixed at a rate per annum of ____% (the "Coupon Rate") of the liquidation amount of $__ per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one quarter period will bear interest thereon compounded quarterly at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions", as used herein, includes such cash distributions and any such interest payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds on hand legally available therefor. Distributions on the Capital Securities will be cumulative, will accumulate from the most recent date to which Distributions have been paid or duly provided for or, if no Distributions have been paid or duly provided for, from _________________, 1997 and will be payable quarterly in arrears, on March 15, June 15, September 15 and December 15 of each year, commencing on March 15, 1998, except as otherwise described below. Distributions will be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period less than a full calendar month, the number of days elapsed in such month. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 20 consecutive calendar quarters, including the first quarter during such extension period (each an "Extension Period"), provided that no Extension Period shall end on a day other than an interest payment date for the Debentures or shall extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Despite such deferral, quarterly Distributions will continue to accumulate with interest thereon (to the extent permitted by applicable law, but not at a rate exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded quarterly during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 20 consecutive quarters, including the first quarter during such Extension Period, or extend beyond the Maturity Date of the Debentures. Payments of accumulated Distributions will be payable to Holders as they appear on the books and records of the Trust on the first record date preceding the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. Subject to the prior obtaining of any regulatory approval then required and to certain other conditions set forth in the Declaration and the Indenture, the Property Trustee may, at the direction of the Holder of the Common Securities, at any time dissolve the Trust and, after satisfaction of liabilities to creditors of the Trust as required by applicable law, cause the Debentures to be distributed to the holders of the Securities in liquidation of the Trust or, simultaneous with any prepayment of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. 79 The Capital Securities shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to conflict of laws principles that would call for the application of the substantive law of any jurisdiction other than the State of Delaware). The Capital Securities shall be redeemable as provided in the Declaration. The Capital Securities shall be convertible into shares of Common Stock, through (i) the exchange of Capital Securities for an appropriate principal amount of Debentures and (ii) the immediate conversion of such Debentures into shares of Common Stock, in the manner and according to the terms set forth in Annex I to the Declaration and in the Indenture. The conversion rights of the Holders of Capital Securities are subject to termination at the option of the Debenture Issuer on and after _____________, ____ subject to and upon satisfaction of certain conditions set forth in Annex I to the Declaration and in the Indenture. 80 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security certificate to: ______________________________________________________ ______________________________________________________ (Insert assignees social security or tax identification number) ______________________________________________________ ______________________________________________________ ______________________________________________________ (Insert address and zip code of assignee) and irrevocably appoints ______________________________________________________ ______________________________________________________ ______________________________________________________ agent to transfer this Capital Security certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: _______________________ Signature: __________________ (Sign exactly as your name appears on the other side of this Capital Security certificate) Signature Guarantee(3): ___________________________________ ______________________ 3 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. 81 Schedule A(1) The initial aggregate liquidation amount of Capital Securities evidenced by the Certificate to which this Schedule is attached is $_____________ (equivalent to ______ Capital Securities). The notations on the following table evidence decreases and increases in the number of Capital Securities evidenced by such Certificate.
- ---------------------------------------------------------------------------------------------- DECREASE IN INCREASE IN LIQUIDATION AMOUNT NOTATION BY REGISTRAR LIQUIDATION AMOUNT OF LIQUIDATION AMOUNT OF CAPITAL SECURITIES CAPITAL SECURITIES OF CAPITAL SECURITIES AFTER SUCH INCREASE - ----------------------------------------------------------------------------------------------
____________________ 1. Append to Global Capital Securities only. 82 CONVERSION REQUEST To: State Street Bank and Trust Company, as Conversion Agent of Holders of Capital Securities. The undersigned owner of these Capital Securities hereby irrevocably exercises the option to convert these Capital Securities, or the portion below designated, into Common Stock of LIFE Financial Corporation (the "Common Stock") in accordance with the terms of the Amended and Restated Declaration of Trust (the "Declaration"), dated as of __________ __, 1997, by Daniel L. Perl and L. Bruce Mills, Jr., as Administrators, Delaware Trust Capital Management, as Delaware Trustee, State Street Bank and Trust Company, as Property Trustee, LIFE Financial Corporation, as Sponsor, and by the Holders, from time to time, of undivided beneficial interests in the assets of the Trust to be issued pursuant to the Declaration. Pursuant to the aforementioned exercise of the right to convert these Capital Securities, the undersigned hereby directs the Conversion Agent (as that term is defined in the Declaration) to (i) exchange such Capital Securities for a portion of the Debentures (as that term is defined in the Declaration) held by the Trust (at the rate of exchange specified in the terms of the Capital Securities set forth as Annex I to the Declaration) and (ii) immediately convert such Debentures on behalf of the undersigned, into Common Stock (at the conversion price specified in the terms of the Capital Securities set forth as Annex I to the Declaration). The undersigned also hereby directs the Conversion Agent that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares, be issued in the name of and delivered to the undersigned, unless a different name has been indicated in the assignment below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Date: __________________ Number of Capital Securities to be converted: ____________________ If a name or names other than the undersigned, please indicate in the spaces below the name or names in which the shares of Common Stock are to be issued, along with the address or addresses of such person or persons. ______________________________________________________ ______________________________________________________ ______________________________________________________ (Sign exactly as your name appears on the other side of this Capital Security certificate) (for conversion only). Please Print or Type Name and Address, Including Zip Code, and Social Security or Other Identifying Number. ______________________________________ ______________________________________ ______________________________________ Signature Guarantee: *____________________________ ____________________________ * Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockholder, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. 83 EXHIBIT B-1 FORM OF COMMON SECURITY CERTIFICATE THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS COMMON SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT UPON LIMITED CIRCUMSTANCES SET FORTH IN THE DECLARATION. CERTIFICATE NUMBER NUMBER OF COMMON SECURITIES CERTIFICATE EVIDENCING COMMON SECURITIES OF LIFE FINANCIAL CAPITAL TRUST ___% COMMON SECURITIES (LIQUIDATION AMOUNT $__ PER COMMON SECURITY) LIFE Financial Capital Trust, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that LIFE Financial Corporation (the "Holder") is the registered owner of ____________ common securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the ____% Convertible Common Securities (liquidation amount $__ per Common Security) (the "Common Securities"). The Common Securities are not transferable except to the extent permitted by the Declaration. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of ___________, 1997, as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration. Capitalized terms used but not defined herein shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration, the Common Securities Guarantee and the Indenture (including any supplemental indenture) to a Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this certificate, the Sponsor is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Common Securities Guarantee to the extent provided therein. By its acceptance, the Holder agrees to treat, for United States federal income tax purposes, the Trust as a grantor trust, the Debentures as indebtedness and the Common Securities as evidence of indirect beneficial ownership in the Debentures. B-1 IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of ________ , 1997. LIFE FINANCIAL CAPITAL TRUST By: ________________________ Name: Title: Administrator B-2 [FORM OF REVERSE OF SECURITY] Distributions payable on each Common Security will be fixed at a rate per annum of ____% (the "Coupon Rate") of the liquidation amount of $__ per Common Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one quarter will bear interest thereon compounded quarterly at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions", as used herein, includes such cash distributions and any such interest payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor. Distributions on the Common Securities will be cumulative, will accrue from the most recent date to which Distributions have been paid or duly provided or, if no Distributions have been paid or duly provided, from ___________, 1997 and will be payable quarterly in arrears, on March 15, June 15, September 15 and December 15 of each year, commencing on March 15, 1998, except as otherwise described below. Distributions will be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period less than a full calendar month, the number of days elapsed in such month. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 20 consecutive calendar quarters, including the first such quarter during such extension period (each an "Extension Period"), provided that no Extension Period shall end on a day other than an interest payment date for the Debentures or extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Despite such deferral, Distributions will continue to accumulate with interest thereon (to the extent permitted by applicable law, but not at a rate exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded quarterly during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 20 consecutive quarters, including the first quarter during such Extension Period, or extend beyond the Maturity Date of the Debentures. Payments of accrued Distributions will be payable to Holders as they appear on the books and records of the Trust on the first record date preceding the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. Subject to the Sponsor obtaining any regulatory prior approval then required and to certain other conditions set forth in the Declaration and the Indenture, the Property Trustee may, at the direction of the Holders of the Common Securities, at any time dissolve the Trust and, after satisfaction of liabilities to creditors of the Trust as required by applicable law, cause the Debentures to be distributed to the holders of the Securities in liquidation of the Trust or, simultaneous with any prepayment of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. The Common Securities shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to conflicts by laws principles that would call for the application of the substantive law of any jurisdiction other than the State of Delaware). The Common Securities shall be redeemable as provided in the Declaration. The Common Securities shall be convertible into shares of Common Stock, through (i) the exchange of Common Securities for an appropriate principal amount of Debentures and (ii) the immediate conversion of such Debentures into shares of Common Stock, in the manner and according to the terms set forth in Annex I to the Declaration and in the Indenture. The conversion rights of the Holders of Common Securities are subject to termination at the option of the Debenture Issuer on and after ____________, ____, subject to and upon satisfaction of certain conditions set forth in Annex I to the Declaration and in the Indenture. B-3 CONVERSION REQUEST TO: NAME OF TRUSTEE, AS CONVERSION AGENT OF HOLDERS OF COMMON SECURITIES The undersigned owner of these Common Securities hereby irrevocably exercises the option to convert these Common Securities, or the portion below designated, into Common Stock of LIFE Financial Corporation (the "Common Stock") in accordance with the terms of the Amended and Restated Declaration of Trust (the "Declaration"), dated as of __________ __, 1997, by Daniel L. Perl and L. Bruce Mills, Jr., as Administrators, Delaware Trust Capital Management, as Delaware Trustee, State Street Bank and Trust Company, as Property Trustee, LIFE Financial Corporation, as Sponsor, and by the Holders, from time to time, of undivided beneficial interests in the assets of the Trust to be issued pursuant to the Declaration. Pursuant to the aforementioned exercise of the right to convert these Common Securities, the undersigned hereby directs the Conversion Agent (as that term is defined in the Declaration) to (i) exchange such Common Securities for a portion of the Debentures (as that term is defined in the Declaration) held by the Trust (at the rate of exchange specified in the terms of the Common Securities set forth as Annex I to the Declaration) and (ii) immediately convert such Debentures on behalf of the undersigned, into Common Stock (at the conversion price specified in the terms of the Common Securities set forth as Annex I to the Declaration). The undersigned also hereby directs the Conversion Agent that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares, be issued in the name of and delivered to the undersigned, unless a different name has been indicated in the assignment below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Date: __________________ Number of Common Securities to be converted: ____________________ If a name or names other than the undersigned, please indicate in the spaces below the name or names in which the shares of Common Stock are to be issued, along with the address or addresses of such person or persons. ________________________________________________________________________________ (Sign exactly as your name appears on the other side of this Common Security certificate) (for conversion only) B-4 Please Print or Type Name and Address, Including Zip Code, and Social Security or Other Identifying Number. ______________________________________________________ ______________________________________________________ ______________________________________________________ Signature Guarantee: *____________________________ _________________________ * Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockholder, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. B-5 EX-4.2 5 FORM OF INDENTURE BETWEEN THE COMPANY & TRUSTEE EXHIBIT 4.2 ================================================================================ LIFE FINANCIAL CORPORATION _____________________________ INDENTURE DATED AS OF _________, 1997 _____________________________ STATE STREET BANK AND TRUST COMPANY AS TRUSTEE _____________________________ JUNIOR CONVERTIBLE SUBORDINATED DEBENTURES =========================================================================== TIE-SHEET of provisions of Trust Indenture Act of 1939 with Indenture dated as of __________, 1997 between LIFE Financial Corporation and ____________________, as Trustee:
ACT SECTION INDENTURE SECTION 310(a)(1)............................................................................. 6.9 (a)(2)................................................................................ 6.9 310(a)(3)............................................................................. N/A (a)(4)................................................................................ N/A 310(a)(5)............................................................................. 6.10, 6.11 310(b)................................................................................ N/A 310(c)................................................................................ 6.13 311(a) and (b)........................................................................ N/A 311(c)................................................................................ 4.1,4.2(a) 312(a)................................................................................ 4.2 312(b) and (c)........................................................................ 4.4 313(a)................................................................................ 4.4 313(b)(1)............................................................................. 4.4 313(b)(2)............................................................................. 4.4 313(c)................................................................................ 4.4 313(d)................................................................................ 4.4 314(a)................................................................................ 4.3 314(b)................................................................................ N/A 314(c)(1) and (2)..................................................................... 6.7 314(c)(3)............................................................................. N/A 314(d)................................................................................ N/A 314(e)................................................................................ 6.7 314(f)................................................................................ N/A 315(a)(c) and (d)..................................................................... 6.1 315(b)................................................................................ 5.8 315(e)................................................................................ 5.9 316(a)(1)............................................................................. 5.7 316(a)(2)............................................................................. N/A 316(a) last sentence.................................................................. 2.9 316(b)................................................................................ 9.2 317(a)................................................................................ 5.5 317(b)................................................................................ 6.5 318(a)................................................................................ 13.8
THIS TIE-SHEET IS NOT PART OF THE INDENTURE AS EXECUTED. i TABLE OF CONTENTS ARTICLE I - DEFINITIONS............................................................................. 1 SECTION 1.1 Definitions................................................................... 1 ARTICLE II - SECURITIES............................................................................. 8 SECTION 2.1. Forms Generally............................................................... 8 SECTION 2.2. Execution and Authentication.................................................. 8 SECTION 2.3. Form and Payment.............................................................. 9 SECTION 2.4. Global Security............................................................... 9 SECTION 2.5. Interest...................................................................... 10 SECTION 2.6. Transfer and Exchange......................................................... 11 SECTION 2.7. Replacement Securities........................................................ 11 SECTION 2.8. [Intentionally Omitted]....................................................... 12 SECTION 2.9. Temporary Securities.......................................................... 12 SECTION 2.10. Cancellation.................................................................. 12 SECTION 2.11. Defaulted Interest............................................................ 12 SECTION 2.12. CUSIP Numbers................................................................. 13 ARTICLE III - PARTICULAR COVENANTS OF THE COMPANY................................................... 13 SECTION 3.1. Payment of Principal, Premium and Interest.................................... 13 SECTION 3.2. Offices for Notices and Payments, Etc......................................... 14 SECTION 3.3. Appointments to Fill Vacancies in Trustee's Office............................ 14 SECTION 3.4. Provision as to Paying Agent.................................................. 14 SECTION 3.5. Certificate to Trustee........................................................ 15 SECTION 3.6. Compliance with Consolidation Provisions...................................... 15 SECTION 3.7. Limitation on Dividends....................................................... 15 SECTION 3.8. Covenants as to LFC Trust..................................................... 16 SECTION 3.9. Payment of Expenses........................................................... 16 SECTION 3.10. Payment Upon Resignation or Removal........................................... 17 ARTICLE IV - SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE....................................................... 17 SECTION 4.1. Securityholders' Lists........................................................ 17 SECTION 4.2. Preservation and Disclosure of Lists.......................................... 18 SECTION 4.3. Reports by Company............................................................ 19 SECTION 4.4. Reports by the Trustee........................................................ 19 ARTICLE V - REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT........................................................... 20 SECTION 5.1. Events of Default............................................................. 20 SECTION 5.2. Payment of Securities on Default; Suit Therefor............................... 21 SECTION 5.3. Application of Moneys Collected by Trustee.................................... 23
ii SECTION 5.4. Proceedings by Securityholders............................................... 23 SECTION 5.5. Proceedings by Trustee....................................................... 24 SECTION 5.6. Remedies Cumulative and Continuing........................................... 24 SECTION 5.7. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders............................................... 24 SECTION 5.8. Notice of Defaults........................................................... 25 SECTION 5.9. Undertaking to Pay Costs..................................................... 25 ARTICLE VI - CONCERNING THE TRUSTEE................................................................ 25 SECTION 6.1. Duties and Responsibilities of Trustee....................................... 25 SECTION 6.2. Reliance on Documents, Opinions, Etc......................................... 26 SECTION 6.3. No Responsibility for Recitals, Etc.......................................... 27 SECTION 6.4. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities....................................... 27 SECTION 6.5. Moneys to be Held in Trust................................................... 28 SECTION 6.6. Compensation and Expenses of Trustee......................................... 28 SECTION 6.7. Officers' Certificate as Evidence............................................ 28 SECTION 6.8. Conflicting Interest of Trustee.............................................. 29 SECTION 6.9. Eligibility of Trustee....................................................... 29 SECTION 6.10. Resignation or Removal of Trustee............................................ 29 SECTION 6.11. Acceptance by Successor Trustee.............................................. 30 SECTION 6.12. Succession by Merger, Etc.................................................... 31 SECTION 6.13. Limitation on Rights of Trustee as a Creditor................................ 31 SECTION 6.14. Authenticating Agents........................................................ 31 ARTICLE VII - CONCERNING THE SECURITYHOLDERS....................................................... 32 SECTION 7.1. Action by Securityholders.................................................... 32 SECTION 7.2. Proof of Execution by Securityholders........................................ 33 SECTION 7.3. Who Are Deemed Absolute Owners............................................... 33 SECTION 7.4. Securities Owned by Company Deemed Not Outstanding........................... 33 SECTION 7.5. Revocation of Consents; Future Holders Bound................................. 33 ARTICLE VIII - SECURITYHOLDERS' MEETINGS........................................................... 34 SECTION 8.1. Purposes of Meetings......................................................... 34 SECTION 8.2. Call of Meetings by Trustee.................................................. 34 SECTION 8.3. Call of Meetings by Company or Securityholders............................... 34 SECTION 8.4. Qualifications for Voting.................................................... 35 SECTION 8.5. Regulations.................................................................. 35 SECTION 8.6. Voting....................................................................... 36 ARTICLE IX - AMENDMENTS............................................................................ 36 SECTION 9.1. Without Consent of Securityholders........................................... 36 SECTION 9.2. With Consent of Securityholders.............................................. 37
iii SECTION 9.3. Compliance with Trust Indenture Act; Effect of Supplemental Indentures...................................................... 38 SECTION 9.4. Notation on Securities....................................................... 38 SECTION 9.5. Evidence of Compliance of Supplemental Indenture to be Furnished to the Trustee............................................... 39 ARTICLE X - CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE....................................... 39 SECTION 10.1. Company May Consolidate, Etc., on Certain Terms.............................. 39 SECTION 10.2. Successor Corporation to be Substituted for Company.......................... 39 SECTION 10.3. Opinion of Counsel to be Received by Trustee................................. 40 ARTICLE XI - SATISFACTION AND DISCHARGE OF INDENTURE................................................ 40 SECTION 11.1. Discharge of Indenture....................................................... 40 SECTION 11.2. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee............................................... 40 SECTION 11.3. Paying Agent to Repay Moneys Held............................................ 41 SECTION 11.4. Return of Unclaimed Moneys................................................... 41 SECTION 11.5. Defeasance Upon Deposit of Moneys or U.S. Government Obligations.................................................................. 41 ARTICLE XII - IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS....................... 42 SECTION 12.1. Indenture and Securities Solely Corporate Obligations........................ 42 ARTICLE XIII - MISCELLANEOUS PROVISIONS............................................................. 43 SECTION 13.1. Successors................................................................... 43 SECTION 13.2. Official Acts by Successor Corporation....................................... 43 SECTION 13.3. Surrender of Company Powers.................................................. 43 SECTION 13.4. Addresses for Notices, Etc................................................... 43 SECTION 13.5. Governing Law................................................................ 43 SECTION 13.6. Evidence of Compliance with Conditions Precedent............................. 44 SECTION 13.7. Business Days................................................................ 44 SECTION 13.8. Trust Indenture Act to Control............................................... 44 SECTION 13.9. Table of Contents, Headings, Etc............................................. 44 SECTION 13.10. Execution in Counterparts.................................................... 44 SECTION 13.11. Separability................................................................. 44 SECTION 13.12. Assignment................................................................... 45 SECTION 13.13. Acknowledgment of Rights..................................................... 45
iv ARTICLE XIV - PREPAYMENT OF SECURITIES -- MANDATORY AND OPTIONAL SINKING FUND....................... 45 SECTION 14.1. Special Event Repayment...................................................... 45 SECTION 14.2. Optional Prepayment by Company............................................... 45 SECTION 14.3. No Sinking Fund.............................................................. 46 SECTION 14.4. Notice of Prepayment; Selection of Securities................................ 46 SECTION 14.5. Payment of Securities Called for Prepayment.................................. 47 ARTICLE XV - SUBORDINATION OF SECURITIES............................................................ 47 SECTION 15.1. Agreement to Subordinate..................................................... 47 SECTION 15.2. Default on Senior Indebtedness............................................... 47 SECTION 15.3. Liquidation; Dissolution; Bankruptcy......................................... 48 SECTION 15.4. Subrogation.................................................................. 49 SECTION 15.5. Trustee to Effectuate Subordination.......................................... 49 SECTION 15.6. Notice by the Company........................................................ 50 SECTION 15.7. Rights of the Trustee; Holders of Senior Indebtedness................................................................. 50 SECTION 15.8. Subordination May Not Be Impaired............................................ 51 ARTICLE XVI - EXTENSION OF INTEREST PAYMENT PERIOD.................................................. 51 SECTION 16.1. Extension of Interest Payment Period......................................... 51 SECTION 16.2. Notice of Extension.......................................................... 52 ARTICLE XVII - CONVERSION OF SECURITIES............................................................. 52 SECTION 17.1. Conversion Rights............................................................ 52 SECTION 17.2. Conversion Procedures........................................................ 53 SECTION 17.3. Conversion Price Adjustments................................................. 55 SECTION 17.4. Reclassification, Consolidation, Merger or Sale of Assets.................................................................... 58 SECTION 17.5. Notice of Adjustments of Conversion Price.................................... 58 SECTION 17.6. Prior Notice of Certain Events............................................... 58 SECTION 17.7. Certain Defined Terms........................................................ 59 SECTION 17.8. Benefit Plans................................................................ 60 SECTION 17.9. Certain Additional Rights.................................................... 60 SECTION 17.10. Trustee Not Responsible for Determining Conversion Price or Adjustments......................................................... 60 SECTION 17.11. Expiration of Conversion Rights.............................................. 61
v THIS INDENTURE, dated as of ________, 1997, between LIFE FINANCIAL CORPORATION, a Delaware corporation (hereinafter sometimes called the "Company"), and State Street Bank and Trust Company, a Massachusetts trust company, as trustee (hereinafter sometimes called the "Trustee"), W I T N E S S E T H : In consideration of the premises, and the purchase of the Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Securities, as follows: ARTICLE I DEFINITIONS SECTION 1.1. Definitions. ----------- The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture shall have the respective meanings specified in this Section 1.1. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), or which are by reference therein defined in the Securities Act, shall (except as herein otherwise expressly provided or unless the context otherwise requires) have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture as originally executed. The following terms have the meanings given to them in the Declaration: (i) Clearing Agency; (ii) Delaware Trustee; (iii) Property Trustee; (iv) Administrator; (v) Direct Action; (vi) Underwriting Agreement; (vii) Public Offering; (viii) Distribution and (ix) Conversion Termination Date. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Headings are used for convenience of reference only and do not affect interpretation. The singular includes the plural and vice versa. "Additional Interest" shall have the meaning set forth in Section 2.5(c). "Affiliate" means, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding the power to vote 10% or more of the outstanding voting securities or other ownership interests of the specified Person, (b) any Person 10% or more of whose outstanding voting securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person, (c) any Person directly or indirectly controlling, controlled by, or under common control with the specified Person, (d) a partnership in which the specified Person is a general partner, (e) any officer or director of the specified Person, and (f) if the specified Person is an individual, any entity of which the specified Person is an officer, director or general partner. "Allocable Amounts," when used with respect to any Senior Indebtedness, means all amounts due or to become due on such Senior Indebtedness less, if applicable, any amount which would have been paid to, and retained by, the holders of such Senior Indebtedness (whether as a result of the receipt of payments by the holders of such Senior Indebtedness from the Company or any other obligor thereon or from any holders of, or trustee in respect of, other indebtedness that is subordinate and junior in right of payment to such Senior Indebtedness pursuant to any provision of such indebtedness for the payment over of amounts 1 received on account of such indebtedness to the holders of such Senior Indebtedness or otherwise) but for the fact that such Senior Indebtedness is subordinate or junior in right of payment to (or subject to a requirement that amounts received on such Senior Indebtedness be paid over to obligees on) trade accounts payable or accrued liabilities arising in the ordinary course of business. "Authenticating Agent" shall mean any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.14. "Bankruptcy Law" shall mean Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" shall mean either the Board of Directors of the Company or any duly authorized committee of that board. "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" shall mean, with respect to any series of Securities, any day other than a Saturday or a Sunday or a day on which banking institutions in California are authorized or required by law or executive order to close. "Capital Securities" shall mean preferred undivided beneficial interests in the assets of LFC Trust which rank pari passu with the Common Securities issued by LFC Trust; provided, however, that if an Event of Default has occurred and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the holders of the Capital Securities shall be paid in full the Distributions and the liquidation, redemption and other payments to which they are entitled. "Capital Securities Guarantee" shall mean any guarantee that the Company may enter into with State Street Bank and Trust Company or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities. "Commission" shall mean the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Securities" shall mean undivided beneficial interests in the assets of LFC Trust which rank pari passu with Capital Securities issued by LFC Trust; provided, however, that if an Event of Default has occurred and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the holders of the Capital Securities shall be paid in full the Distributions and the liquidation, redemption and other payments to which they are entitled. "Common Securities Guarantee" shall mean any guarantee of the Company that operates directly or indirectly for the benefit of holders of Common Securities. 2 "Common Stock" shall mean the common stock, par value $0.01 per share, of the Company or any other class of stock resulting from changes or reclassifications of such common stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. "Company" shall mean LIFE Financial Corporation, a Delaware corporation, and, subject to the provisions of Article X, shall include its successors and assigns. "Company Request" or "Company Order" shall mean a written request or order signed in the name of the Company by the Chairman, the Chief Executive Officer, the President, a Vice Chairman, a Vice President, the Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. "Compounded Interest" shall have the meaning set forth in Section 16.1. "Conversion Agent" means the Person appointed to act on behalf of the holders of Capital Securities in effecting the conversion of Capital Securities to Securities and Securities to Common Stock as and in the manner set forth in the Declaration and in this Indenture. "Conversion Request" means (a) the irrevocable request to be given by a holder of Securities to the Conversion Agent directing the Conversion Agent to convert such Security into shares of Common Stock and (b) the irrevocable request to be given by a holder of Capital Securities to the Conversion Agent directing the Conversion Agent to exchange such Capital Securities for Securities and to convert such Securities into Common Stock on behalf of such holder. "Coupon Rate" shall have the meaning set forth in Section 2.5. "Custodian" shall mean any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law. "Declaration" means the Amended and Restated Declaration of Trust of LFC Trust, dated as of the Issue Date. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Deferred Interest" shall have the meaning set forth in Section 16.1. "Definitive Securities" shall mean those securities issued in fully registered certificated form not otherwise in global form. "Depositary" shall mean, with respect to Securities of any series, for which the Company shall determine that such Securities will be issued as a Global Security, The Depository Trust Company, New York, New York, another clearing agency, or any successor registered as a clearing agency under the Exchange Act or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to Section 2.5(d). "Dissolution Event" means the liquidation of the LFC Trust pursuant to the Declaration, and the distribution of the Securities held by the Property Trustee to the holders of the Trust Securities issued by the LFC Trust pro rata in accordance with the Declaration. 3 "Event of Default" shall mean any event specified in Section 5.1, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Extended Interest Payment Period" shall have the meaning set forth in Section 16.1. "Federal Reserve" shall mean the Board of Governors of the Federal Reserve System. "Global Security" means, with respect to the Securities, a Security executed by the Company and delivered by the Trustee to the Depositary or pursuant to the Depositary's instruction, all in accordance with the Indenture, which shall be registered in the name of the Depositary or its nominee. "Indebtedness for Money Borrowed" shall mean (i) any obligation of, or any obligation guaranteed by, the Company for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments and any deferred obligation for the payment of the purchase price of property or assets acquired other than in the ordinary course of business, and (ii) all indebtedness of the Company for claims in respect of derivative products such as interest and foreign exchange rate contracts, commodity contracts and similar arrangements, whether outstanding on the date of execution of the Indenture or thereafter created, assumed or incurred. For purposes of this definition, "claim" shall have the meaning assigned in Section 101(5) of the Bankruptcy Code of 1978, as amended and in effect on the date of the execution of this Indenture. "Indebtedness Ranking Junior to the Securities" shall mean any Indebtedness for Money Borrowed, whether outstanding on the date of execution of this Indenture or hereafter created, assumed or incurred, which specifically by its terms ranks junior to and not equally with or prior to the Securities (and any other Indebtedness Ranking on a Parity with the Securities) in right of payment upon the happening of any dissolution or winding up or liquidation or reorganization of the Company. The securing of any Indebtedness for Money Borrowed of the Company, otherwise constituting Indebtedness Ranking Junior to the Securities, shall not be deemed to prevent such Indebtedness for Money Borrowed from constituting Indebtedness Ranking Junior to the Securities. "Indebtedness Ranking on a Parity with the Securities" shall mean Indebtedness for Money Borrowed, whether outstanding on the date of execution of this Indenture or hereafter created, assumed or incurred, which specifically by its terms ranks equally with and not prior to the Securities in the right of payment upon the happening of any dissolution or winding up or liquidation or reorganization of the Company. The securing of any Indebtedness for Money Borrowed of the Company, otherwise constituting Indebtedness Ranking on a Parity with the Securities, shall not be deemed to prevent such Indebtedness for Money Borrowed from constituting Indebtedness Ranking on a Parity with the Securities. "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. "Initial Optional Prepayment Date" means ___________, ____. "Interest Payment Date" shall have the meaning set forth in Section 2.5. "Investment Company Event" means the receipt by the Company and LFC Trust of an opinion of Muldoon, Murphy & Faucette or any other nationally recognized counsel experienced in such matters, to the effect that (a) as a result of any amendment to, or change (including any announced prospective change) in, 4 the laws or any regulations thereunder of the United States or any political subdivision or authority thereof or therein or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the Issue Date, there is more than an insubstantial risk that LFC Trust is or within 90 days will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended. "Issue Date" means _______, 1997. "LFC Trust" shall mean LIFE Financial Capital Trust, a Delaware business trust created for the purpose of issuing its undivided beneficial interests in connection with the issuance of Securities under this Indenture. "Maturity Date" shall mean __________, 2027. "Non Book-Entry Capital Securities" shall have the meaning set forth in Section 2.5. "Officers" shall mean any of the Chairman, the Co-Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President, the Comptroller, the Secretary or an Assistant Secretary of the Company. "Officers' Certificate" shall mean a certificate signed by two Officers and delivered to the Trustee. "Opinion of Counsel" shall mean a written opinion of counsel, who may be an employee of the Company, and who shall be acceptable to the Trustee. "Optional Prepayment Price" shall have the meaning set forth in Section 14.2. "Other Debentures" means all junior subordinated debentures issued by the Company from time to time and sold to trusts to be established by the Company (if any), in each case similar to the LFC Trust. "Other Guarantees" means all guarantees issued by the Company with respect to capital securities (if any) and issued to other trusts established by the Company (if any), in each case similar to the LFC Trust. The term "outstanding" when used with reference to Securities, shall, subject to the provisions of Section 7.4, mean, as of any particular time, all Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except: (a) Securities theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or prepayment of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided that, if such Securities, or portions thereof, are to be prepaid prior to maturity thereof, notice of such prepayment shall have been given as in Article XIV provided or provision satisfactory to the Trustee shall have been made for giving such notice; and 5 (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.7 unless proof satisfactory to the Company and the Trustee is presented that any such Securities are held by bona fide holders in due course. "Person" shall mean any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt and as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 2.7 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security. "Prepayment Date" when used with respect to any Security to be prepaid, means the date fixed for such prepayment by or pursuant to this Indenture. "Prepayment Price" means the Special Event Prepayment Price or the Optional Prepayment Price, as the context requires. "Principal Office of the Trustee", or other similar term, shall mean the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered. "Property Trustee" shall have the same meaning as set forth in the Declaration. "Regulatory Capital Event" means the receipt by the Company and the LFC Trust of an opinion of Muldoon, Murphy & Faucette or any other independent bank regulatory counsel experienced in such matters, to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any rules, guidelines or policies of the Office of Thrift Supervision, the Federal Reserve or any other federal bank regulatory agency or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the Issue Date, (i) the Company is or within 90 days will be subject to capital adequacy requirements and such requirements do not or will not permit the Capital Securities to constitute, subject to limitations on inclusion of the Capital Securities as Tier 1 capital by the Federal Reserve capital guidelines in effect as of the date of the prospectus used in connection with the offering and sale of the Capital Securities, Tier 1 capital (or its then-equivalent) or (ii) the amount of net proceeds received from the sale of the Capital Securities and contributed by the Company to its subsidiary, Life Bank, does not or within 90 days will not constitute Tier 1 (core) capital (or its then-equivalent). "Responsible Officer", when used with respect to the Trustee, shall mean any vice president, any assistant secretary, any assistant treasurer or senior trust officer, any trust officer or assistant trust officer, or any other officer or assistant officer of the Principal Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Securities" means the Company's ____% Junior Subordinated Convertible Debentures due __________, 2027, as authenticated and issued under this Indenture. "Securities Act" shall mean the Securities Act of 1933, as amended. 6 "Security Register" shall mean (i) prior to a Dissolution Event, the list of holders provided to the Trustee pursuant to Section 4.1, and (ii) following a Dissolution Event, any security register maintained by a security registrar for the Securities appointed by the Company following the execution of a supplemental indenture providing for transfer procedures as provided for in Section 2.6(a). "Securityholder", "holder of Securities", or other similar terms, shall mean any person in whose name at the time a particular Security is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. "Senior Indebtedness" shall mean all Indebtedness for Money Borrowed, whether outstanding on the date of execution of this Indenture or thereafter created, assumed or incurred, except Indebtedness Ranking on a Parity with the Securities or Indebtedness Ranking Junior to the Securities, and any deferrals, renewals or extensions of such Senior Indebtedness. "Special Event" means a Tax Event, Regulatory Capital Event or an Investment Company Event, as the case may be. "Special Event Prepayment Price" shall mean, with respect to any prepayment of the Securities pursuant to Section 14.1 hereof, an amount in cash equal to 100% of the principal amount to be prepaid plus any accrued and unpaid interest thereon, including Compounded Interest and Additional Interest, if any, to the date of such redemption. "Subsidiary" shall mean with respect to any Person, (i) any corporation at least a majority of whose outstanding voting stock is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of whose outstanding partnership or similar interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Tax Event" means (a) the receipt by the Company and the LFC Trust of an opinion of Muldoon, Murphy & Faucette of any other nationally recognized tax counsel experienced in such matters, to the effect that as a result of (i) any amendment to, clarification of, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, (ii) any amendment to, clarification of, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination or the publication of an explanation of legislation by the staff of the Joint Committee on Taxation), (iii) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (iv) any judicial decision, administrative pronouncement, ruling, regulatory procedure, notice, announcement (including any notice or announcement of intent to adopt procedures or regulations) or any other actions taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case, on or after the Issue Date, there is more than an insubstantial risk that (x) the LFC Trust is or within 90 days will be subject to United States federal income tax with respect to income received or accrued on the Securities, (y) interest payable by the Company on the Securities is not or within 90 days will not be 7 deductible by the Company, in whole or in part, for United States federal income tax purposes, or (z) the LFC Trust is or within 90 days will be subject to more than a de minimis amount of other taxes, duties or other governmental charges, or (b) a proposed audit adjustment by a taxing authority which, if sustained, would result in any of the events described in clauses (x), (y) or (z) above (without regard to the 90 day period referred to therein). "Trust Indenture Act of 1939" shall mean the Trust Indenture Act of 1939 as in force at the date of execution of this Indenture, except as provided in Section 9.3. "Trust Securities" shall mean the Capital Securities and the Common Securities, collectively. "Trustee" shall mean the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. The term "Trustee" as used with respect to a particular series of the Securities shall mean the trustee with respect to that series. "Underwriter" shall mean Keefe, Bruyette & Woods, Inc., as underwriter in the Public Offering. "U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. ARTICLE II SECURITIES SECTION 2.1. Forms Generally. --------------- The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, the terms of which are incorporated in and made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject or usage. Each Security shall be dated the date of its authentication. SECTION 2.2. Execution and Authentication. ---------------------------- Two Officers shall sign the Securities for the Company by manual or facsimile signature in the manner set forth in Exhibit A. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of an authorized signatory of the Trustee. The signature of the Trustee shall be conclusive evidence that the Security has been 8 authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Securities shall be substantially as set forth in Exhibit A hereto. The Trustee shall, upon a Company Order, authenticate for original issue up to, and the aggregate principal amount of Securities outstanding at any time may not exceed, $__________ aggregate principal amount of the Securities, except as provided in Sections 2.6, 2.7, 2.9 and 14.5. SECTION 2.3. Form and Payment. ---------------- Except as provided in Section 2.4, the Securities shall be issued in fully registered certificated form without interest coupons. Principal of, premium, if any, and interest on the Securities issued in certificated form will be payable, the transfer of such Securities will be registrable and such Securities will be exchangeable for Securities bearing identical terms and provisions at the office or agency of the Company maintained for such purpose under Section 3.2; provided, however, that payment of interest with respect to the Securities may be made at the option of the Company (i) by check mailed to the holder entitled thereto at such address as shall appear in the Security Register or (ii) by wire transfer to an account maintained by the Person entitled thereto, provided that proper wire transfer instructions have been received in writing by the paying agent by the relevant record date. Notwithstanding the foregoing, so long as the holder of any Securities is the Property Trustee, the payment of the principal of, premium, if any, and interest (including Compounded Interest and Additional Interest, if any) on such Securities held by the Property Trustee will be made at such place and to such account as may be designated by the Property Trustee. SECTION 2.4. Global Security. --------------- (a) In connection with a Dissolution Event, (i) if any Capital Securities are held in book-entry form, the related Definitive Securities shall be presented to the Trustee (if an arrangement with the Depositary has been maintained) by the Property Trustee in exchange for one or more Global Securities (as may be required pursuant to Section 2.6) in an aggregate principal amount equal to the aggregate principal amount of all outstanding Securities, to be registered in the name of the Depositary, or its nominee, and delivered by the Trustee to the Depositary for crediting to the accounts of its participants pursuant to the instructions of the Administrators; the Company upon any such presentation shall execute one or more Global Securities in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with this Indenture; and payments on the Securities issued as a Global Security will be made to the Depositary; and (ii) if any Capital Securities are held in certificated form, the related Definitive Securities may be presented to the Trustee by the Property Trustee and any Capital Security certificate which represents Capital Securities other than Capital Securities in book-entry form ("Non Book-Entry Capital Securities") will be deemed to represent beneficial interests in Securities presented to the Trustee by the Property Trustee having an aggregate principal amount equal to the aggregate liquidation amount of the Non Book-Entry Capital Securities until such Capital Security certificates are presented to the Security Registrar for transfer or reissuance, at which time such Capital Security certificates will be canceled and a Security, registered in the name of the holder of the Capital Security certificate or the transferee of the holder of such Capital Security certificate, as the case may be, with an aggregate principal amount equal to the aggregate liquidation amount of the Capital Security certificate canceled, will be executed by the Company and delivered to the Trustee for authentication and delivery in accordance with the Indenture. Upon the issuance of such 9 Securities, Securities with an equivalent aggregate principal amount that were presented by the Property Trustee to the Trustee will be deemed to have been canceled. (b) The Global Securities shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon; provided, that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges, conversions and prepayments. Any endorsement of a Global Security to reflect the amount of any increase or decrease in the amount of outstanding Securities represented thereby shall be made by the Trustee, in accordance with instructions given by the Company as required by this Section 2.4. (c) The Global Securities may be transferred, in whole but not in part, only to the Depositary, another nominee of the Depositary, or to a successor Depositary selected or approved by the Company or to a nominee of such successor Depositary. (d) If at any time the Depositary notifies the Company that it is unwilling or unable to continue as Depositary or the Depositary has ceased to be a clearing agency registered under the Exchange Act, and a successor Depositary is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, the Company will execute, and the Trustee, upon written notice from the Company, will authenticate and make available for delivery the Definitive Securities, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security in exchange for such Global Security. If there is an Event of Default, the Depositary shall have the right to exchange the Global Securities for Definitive Securities. In addition, the Company may at any time determine that the Securities shall no longer be represented by a Global Security. In the event of such an Event of Default or such a determination, the Company shall execute, and subject to Section 2.6, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and make available for delivery the Definitive Securities, in an aggregate principal amount equal to the principal amount of the Global Security in exchange for such Global Security. Upon the exchange of the Global Security for such Definitive Securities, the Global Security shall be canceled by the Trustee. Such Definitive Securities issued in exchange for the Global Security shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Securities to the Depositary for delivery to the Persons in whose names such Definitive Securities are so registered. SECTION 2.5. Interest. -------- (a) Each Security will bear interest at the rate of ____% per annum (the "Coupon Rate") from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the Issue Date, until the principal thereof becomes due and payable, and at the Coupon Rate on any overdue principal (and premium, if any) and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest, compounded quarterly, payable (subject to the provisions of Article XVI) quarterly, in arrears on March 15, June 15, September 15 and December 15 of each year (each, an "Interest Payment Date") commencing on March 15, 1998, to the Person in whose name such Security or any predecessor Security is registered, at the close of business on the regular record date for such interest installment, which shall be the fifteenth day of the month in which the relevant Interest Payment Date falls. (b) Interest will be computed on the basis of a 360-day year consisting of twelve 30- day months and, for any period of less than a full calendar month, the number of days lapsed in such 30-day month. In the event that any Interest Payment Date falls on a day that is not a Business Day, then payment of interest payable on 10 such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date. (c) During such time as the Property Trustee is the holder of any Securities, the Company shall pay any additional amounts on the Securities as may be necessary in order that the amount of Distributions then due and payable by the LFC Trust shall not be reduced as a result of any additional taxes, duties and other governmental charges to which the LFC Trust has become subject as a result of a Tax Event ("Additional Interest"). SECTION 2.6. Transfer and Exchange. --------------------- (a) General Provisions Relating to Transfers and Exchanges. Upon surrender for registration of transfer of any Security at the office or agency of the Company maintained for the purpose pursuant to Section 3.2, the Company shall execute, and the Trustee shall authenticate and make available for delivery, in the name of the designated transferee or transferees, one or more new Securities of the same series of a like aggregate principal amount. At the option of the holder, Securities may be exchanged for other Securities of the same series of a like aggregate principal amount, upon surrender of the Securities to be exchanged at the office or agency identified above. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and make available for delivery, the Securities which the holder making the exchange is entitled to receive. Every Security presented or surrendered for registration of transfer or exchange (if so required by the Company or the Trustee) shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security registrar duly executed by the holder thereof or such holder's attorney duly authorized in writing. All Definitive Securities and Global Securities issued upon any registration of transfer or exchange of Definitive Securities or Global Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Definitive Securities or Global Securities surrendered upon such registration of transfer or exchange. No service charge shall be made to a holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith. The Company shall not be required to (i) issue, register the transfer of or exchange Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of prepayment or any notice of selection of Securities for prepayment under Article XIV hereof and ending at the close of business on the day of such mailing; or (ii) register the transfer of or exchange any Security so selected for prepayment in whole or in part, except the portion of any Security being prepaid in part. SECTION 2.7. Replacement Securities. ---------------------- If any mutilated Security is surrendered to the Trustee, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, the Company shall issue and the Trustee shall authenticate a replacement Security if the Trustee's requirements for replacements of Securities are met. At the request of the Trustee or the Company, an indemnity bond may be required from 11 the holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any agent thereof or any Authenticating Agent from any loss that any of them may suffer if a Security is replaced. The Company or the Trustee may charge for its expenses in replacing a Security. Every replacement Security is an obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement of mutilated, destroyed, lost or stolen Securities. SECTION 2.8. [Intentionally Omitted] SECTION 2.9. Temporary Securities. -------------------- Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and make available for delivery, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise reproduced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company shall cause definitive Securities to be prepared without unreasonable delay. The definitive Securities shall be printed, lithographed or engraved, or provided by any combination thereof, or in any other manner permitted by the rules and regulations of any applicable securities exchange, all as determined by the officers executing such definitive Securities. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency maintained by the Company for such purpose pursuant to Section 3.2 hereof, without charge to the holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute, and the Trustee shall authenticate and make available for delivery, in exchange therefor the same aggregate principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 2.10. Cancellation. ------------ The Company at any time may deliver Securities to the Trustee for cancellation. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, conversion, replacement or cancellation and shall retain or dispose of canceled Securities in accordance with its normal practices (subject to the record retention requirement of the Exchange Act) unless the Company directs them to be returned to it; provided, that the Trustee shall not be required to destroy such canceled Securities. Subject to the other provisions of the Indenture, the Company may not issue new Securities to replace Securities that have been paid (at maturity or upon prepayment) or that have been delivered to the Trustee for cancellation. SECTION 2.11. Defaulted Interest. ------------------ Any interest on any Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (a) or clause (b) below: 12 (a) The Company may make payment of any Defaulted Interest on Securities to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Security Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest on any Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. SECTION 2.12. CUSIP Numbers. ------------- The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of prepayment as a convenience to Securityholders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of prepayment and that reliance may be placed only on the other identification numbers printed on the Securities, and any such prepayment shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.1. Payment of Principal, Premium and Interest. ------------------------------------------ The Company covenants and agrees for the benefit of the holders of the Securities that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on the Securities at the place, at the respective times and in the manner provided herein. Except as provided in Section 2.3, each installment of interest on the Securities may be paid by mailing checks for such interest payable to the order of the holder of Security entitled thereto as they appear in the Security Register. 13 SECTION 3.2. Offices for Notices and Payments, Etc. -------------------------------------- So long as any of the Securities remain outstanding, the Company will maintain in _______________, an office or agency where the Securities may be presented for payment, an office or agency where the Securities may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Securities or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, any such office or agency for all of the above purposes shall be the Principal Office of the Trustee. In case the Company shall fail to maintain any such office or agency in ___________________, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside _______________, where the Securities may be presented for payment, registration of transfer and for exchange or conversion in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in ________________, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.3. Appointments to Fill Vacancies in Trustee's Office. -------------------------------------------------- The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that at all times there shall be a Trustee hereunder. SECTION 3.4. Provision as to Paying Agent. ---------------------------- (a) If the Company shall appoint a paying agent other than the Trustee with respect to the Securities, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.4, (i) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Securities (whether such sums have been paid to it by the Company or by any other obligor on the Securities of such series) in trust for the benefit of the holders of the Securities (ii) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Securities) to make any payment of the principal of and premium or interest on the Securities when the same shall be due and payable; (iii) that it will at any time during the continuance of any such failure, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by it as such paying agent. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest on the Securities, set aside, segregate and hold in trust for the benefit of the holders of the Securities a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee of its action or any failure to take such action and of any failure 14 by the Company (or by any other obligor under the Securities) to make any payment of the principal of and premium, if any, or interest on the Securities when the same shall become due and payable. Whenever the Company shall have one or more paying agents, it will, on or prior to each due date of the principal of and premium, if any, or interest on any Securities, deposit with a paying agent a sum sufficient to pay the principal of and premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of its action or failure to act. (c) Anything in this Section 3.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such Securities by the Trustee or any paying agent hereunder, as required by this Section 3.4, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.4 is subject to Sections 11.3 and 11.4. SECTION 3.5. Certificate to Trustee. ---------------------- The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year in each year, commencing with the first fiscal year ending after the date hereof, so long as Securities are outstanding hereunder, an Officers' Certificate, one of the signers of which shall be the principal executive, principal financial or principal accounting officer of the Company stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.6. Compliance with Consolidation Provisions. ---------------------------------------- The Company will not, while any of the Securities remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article X hereof are complied with. SECTION 3.7. Limitation on Dividends. ----------------------- If at any time (i) an Event of Default shall have occurred and be continuing (other than solely an Event of Default under Section 5.1(c) hereof), (ii) there shall have occurred any event of which the Company has actual knowledge that (a) is, or with the giving of notice or the lapse of time, or both, would constitute an Event of Default (other than solely an Event of Default under Section 5.1(c) hereof) and (b) in respect of which the Company shall not have taken reasonable steps to cure, (iii) if the Securities are held by the Property Trustee, the Company shall be in default with respect to its payment obligations under the Capital Securities Guarantee or (iv) the Company shall have given notice of its election of the exercise of its right to extend the interest payment period pursuant to Section 16.1 and has not rescinded such notice and any such extension shall have commenced, then, in each such case, the Company will not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Company (including any Other Debentures) that rank pari passu with or junior in right of payment to the Securities or (iii) make any guarantee payments with 15 respect to any guarantee by the Company of any securities of any Subsidiary of the Company (including Other Guarantees) if such guarantee ranks pari passu or junior in right of payment to the Securities, other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or preferred stock of the Company; (b) any declaration of a dividend in connection with the implementation of a stockholder's rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto; (c) payments under the Capital Securities Guarantee; (d) as a direct result of, and only to the extent required in order to avoid the issuance of fractional shares of capital stock following a reclassification of the Company's capital stock or the exchange or the conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock; (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged; and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees. SECTION 3.8. Covenants as to LFC Trust. ------------------------- In the event Securities are issued to LFC Trust or a trustee of such trust in connection with the issuance of Trust Securities by LFC Trust, for so long as such Trust Securities remain outstanding, the Company will (i) maintain 100% direct ownership of the Common Securities of LFC Trust; provided, however, that any successor of the Company, permitted pursuant to Article X, may succeed to the Company's ownership of such Common Securities, (ii) use its reasonable efforts to cause LFC Trust (a) to remain a business trust, except in connection with a distribution of Securities, the redemption of all of the Trust Securities of LFC Trust or certain mergers, consolidations or amalgamations, each as permitted by the Declaration of LFC Trust, and (b) to otherwise continue not to be treated as an association taxable as a corporation or partnership for United States federal income tax purposes and (iii) to use its reasonable efforts to cause each holder of Trust Securities to be treated as owning an individual beneficial interest in the Securities. SECTION 3.9. Payment of Expenses. ------------------- In connection with the offering, sale and issuance of the Securities to LFC Trust and in connection with the sale of the Trust Securities by LFC Trust, the Company, in its capacity as borrower with respect to the Securities, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Securities, including fees to the Underwriter payable in connection with the Public Offering and compensation of the Trustee in accordance with the provisions of Section 6.6; (b) pay all costs and expenses of the LFC Trust (including, but not limited to, costs and expenses relating to the organization of LFC Trust, the offering, sale and issuance of the Trust Securities (including fees to the Underwriter in connection therewith), the fees and expenses of the Property Trustee and the Delaware Trustee, the costs and expenses relating to the operation of LFC Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), conversion agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing and disposition of assets of the LFC Trust; 16 (c) be primarily and fully liable for any indemnification obligations arising with respect to the Declaration; (d) pay any and all taxes (other than United States withholding taxes attributable to LFC Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of LFC Trust; and (e) pay all other fees, expenses, debts and obligations (other than payments of principal of, premium, if any, or interest on the Trust Securities) related to LFC Trust. SECTION 3.10. Payment Upon Resignation or Removal. ----------------------------------- Upon termination of this Indenture or the removal or resignation of the Trustee, unless otherwise stated, the Company shall pay to the Trustee all amounts accrued and owing to the date of such termination, removal or resignation. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Property Trustee, as the case may be, pursuant to Section 5.6 of the Declaration, the Company shall pay to the Delaware Trustee or the Property Trustee, as the case may be, all amounts accrued and owing to the date of such termination, removal or resignation. SECTION 3.11. Reservation of Common Stock. --------------------------- The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of the Company, free from any preemptive or other similar rights, such number of such shares of Common Stock as shall from time to time be issuable upon the conversion of all the Company then outstanding. Notwithstanding the foregoing, the Company shall be entitled to deliver upon conversion of Company, shares of Common Stock reacquired and held in the treasury of the Company (in lieu of the issuance of authorized and unissued shares of Common Stock), so long as any such treasury shares are free and clear of all liens, charges, security interests or encumbrances. Any shares of Common Stock issued upon conversion of the Company shall be duly authorized, validly issued, fully paid and nonassessable. The Trust shall deliver the shares of Common Stock received upon conversion of the Company to the converting Holder free and clear of all liens, charges, security interests and encumbrances, except for United States withholding taxes. SECTION 3.12. Listing of Junior Subordinated Debentures. ----------------------------------------- At such time as the Trust is dissolved or terminated pursuant to Article VIII of the Trust, the Company shall use its best efforts to have the Securities approved for listing on the Nasdaq or on an exchange prior to the time the Securities are distributed to the holders of the Securities. ARTICLE IV SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.1. Securityholders' Lists. ---------------------- The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee: (a) on a quarterly basis on each regular record date for the Securities in connection with the payment of interest thereon, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders as of such record date; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company, of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, 17 except that, no such lists need be furnished so long as the Trustee is in possession thereof by reason of its acting as Security registrar. SECTION 4.2. Preservation and Disclosure of Lists. ------------------------------------ (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of the Securities (1) contained in the most recent list furnished to it as provided in Section 4.1 or (2) received by it in the capacity of Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished. (b) In case three or more holders of Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities or with holders of all Securities with respect to their rights under this Indenture and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within 5 Business Days after the receipt of such application, at its election, either: (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, or (ii) inform such applicants as to the approximate number of holders of all Securities, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee, upon the written request of such applicants, shall mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Securities, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section 4.2, regardless of the source 18 from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 4.3. Reports by Company. ------------------ (a) The Company covenants and agrees to file with the Trustee, within 15 days after the date on which the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as said Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by said Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Company covenants and agrees to transmit by mail to all holders of Securities, as the names and addresses of such holders appear upon the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 4.3 as may be required by rules and regulations prescribed from time to time by the Commission. (d) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 4.4. Reports by the Trustee. ---------------------- (a) The Trustee shall transmit to Securityholders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 313(a) of the Trust Indenture Act, the Trustee, within sixty days after each ____________ following the date of this Indenture, commencing ____________, 1998, shall deliver to Securityholders a brief report, dated as of such __________, which complies with the provisions of such Section 313(a). (b) A copy of each such report shall, at the time of such transmission to Securityholders, be filed by the Trustee with each stock exchange, if any, upon which the Securities are listed, with the Commission and with the Company. The Company will promptly notify the Trustee if the Securities are listed on any stock exchange. 19 ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.1. Events of Default. ----------------- One or more of the following events of default shall constitute an Event of Default hereunder (whatever the reason for such Event of Default and whether it shall be voluntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest upon any Security or any Other Debentures when it becomes due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms hereof shall not constitute a default in the payment of interest for this purpose; or (b) default in the payment of all or any part of the principal of (or premium, if any, on) any Security or any Other Debentures as and when the same shall become due and payable either at maturity, upon prepayment, by declaration of acceleration or otherwise; or (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Company shall commence a voluntary case under any Bankruptcy Law or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due. If an Event of Default with respect to Securities at the time outstanding occurs and is continuing, then in every such case the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities then outstanding may declare the principal amount of all Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the holders of the outstanding Securities), and upon any such declaration the same shall become immediately due and payable. 20 The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Company shall pay or shall deposit with the Trustee a sum sufficient to pay (A) all matured installments of interest upon all the Securities and the principal of and premium, if any, on any and all Securities which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest specified in the Securities to the date of such payment or deposit) and (B) such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and (ii) any and all Events of Default under the Indenture, other than the non-payment of the principal of the Securities which shall have become due solely by such declaration of acceleration, shall have been cured, waived or otherwise remedied as provided herein, then, in every such case, the holders of a majority in aggregate principal amount of the Securities then outstanding, by written notice to the Company and to the Trustee, may rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Securities shall continue as though no such proceeding had been taken. SECTION 5.2. Payment of Securities on Default; Suit Therefor. ----------------------------------------------- The Company covenants that (a) in case default shall be made in the payment of any installment of interest upon any of the Securities as and when the same shall become due and payable, and such default shall have continued for a period of 30 days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Securities as and when the same shall have become due and payable, whether at maturity of the Securities or upon prepayment or by declaration or otherwise, then, upon demand of the Trustee, the Company shall pay to the Trustee, for the benefit of the holders of the Securities, the whole amount that then shall have become due and payable on all such Securities for principal and premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law and, if the Securities are held by LFC Trust or a trustee of such trust, without duplication of any other amounts paid by LFC Trust or a trustee in respect thereof) upon the overdue installments of interest at the rate borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Securities and collect in the manner provided by law out of the 21 property of the Company or any other obligor on the Securities wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Securities under Bankruptcy Law, or any other applicable law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Securities, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.2, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities, and it shall not be necessary to make any holders of the Securities parties to any such proceedings. 22 SECTION 5.3. Application of Moneys Collected by Trustee. ------------------------------------------ Any moneys collected by the Trustee shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses of collection applicable to the Securities and reasonable compensation to the Trustee, its agents, attorneys and counsel, and of all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of its negligence or bad faith; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Securities for principal of (and premium, if any) and interest on the Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference of priority of any kind, according to the amounts due on such Securities for principal (and premium, if any) and interest, respectively; and Fourth: To the Company. SECTION 5.4. Proceedings by Securityholders. ------------------------------ No holder of any Security shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to the Securities specifying such Event of Default, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding, it being understood and intended, and being expressly covenanted by the taker and holder of every Security with every other taker and holder and the Trustee, that no one or more holders of Securities shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Security to receive payment of the principal of (and premium, if any) and interest on such Security, on or after the same shall have become due and payable, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder and by accepting a Security hereunder it is expressly understood, intended and covenanted by the taker and holder of every Security with every other such taker and holder and the Trustee, that no one or more holders of Securities shall have any right in any manner whatsoever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. For the protection and 23 enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. The Company and the Trustee acknowledge that pursuant to the Declaration, the holders of Capital Securities are entitled, in the circumstances and subject to the limitations set forth therein, to commence a Direct Action with respect to any Event of Default under this Indenture and the Securities. SECTION 5.5. Proceedings by Trustee. ---------------------- In case an Event of Default occurs with respect to Securities and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.6. Remedies Cumulative and Continuing. ---------------------------------- Except as provided in the last paragraph of Section 2.7, all powers and remedies given by this Article V to the Trustee or to the Securityholders, to the extent permitted by law, shall be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Securities, and no delay or omission of the Trustee or of any holder of any of the Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.4, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.7. Direction of Proceedings and Waiver of Defaults by Majority ----------------------------------------------------------- of Securityholders. ------------------ The holders of a majority in aggregate principal amount of the Securities at the time outstanding shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee, upon the advice of counsel, shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Trustee, in good faith, by its board of directors or trustees, executive committee or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of the Securities, the holders of a majority in aggregate principal amount of the Securities at the time outstanding may on behalf of the holders of all of the Securities waive any past default or Event of Default and its consequences except a default (a) in the payment of principal of or premium, if any, or interest on any of the Securities or (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Security affected; provided, however, that if the Securities are held by the Property Trustee, such waiver or modification to such waiver shall not be effective until the holders of a majority in aggregate liquidation 24 amount of Trust Securities shall have consented to such waiver or modification to such waiver; and provided further, that if the consent of the holder of each outstanding Security is required, such waiver shall not be effective until each holder of the Trust Securities shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 5.7, said default or Event of Default shall for all purposes of the Securities and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.8. Notice of Defaults. ------------------ The Trustee, within 90 days after the occurrence of a default with respect to the Securities, shall mail to all Securityholders, as the names and addresses of such holders appear upon the Security register, notice of all defaults known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.8 being hereby defined to be the events specified in clauses (a), (b), (c), (d) and (e) of Section 5.1, not including periods of grace, if any, provided for therein, and irrespective of the giving of written notice specified in clause (c) of Section 5.1); and provided that, except in the case of default in the payment of the principal of or premium, if any, or interest on any of the Securities, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders; and provided further, that in the case of any default of the character specified in Section 5.1(c) no such notice to Securityholders shall be given until at least 60 days after the occurrence thereof but shall be given within 90 days after such occurrence. SECTION 5.9. Undertaking to Pay Costs. ------------------------ All parties to this Indenture agree, and each holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court in its discretion may require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.9 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in aggregate principal amount of the Securities outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security against the Company on or after the same shall have become due and payable. ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.1. Duties and Responsibilities of Trustee. -------------------------------------- With respect to the holders of the Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case 25 an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred (i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.7, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (d) None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. SECTION 6.2. Reliance on Documents, Opinions, Etc. ------------------------------------- Except as otherwise provided in Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein may be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; 26 (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (that has not been cured or waived), to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of a majority in aggregate principal amount of the outstanding Securities; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care. SECTION 6.3. No Responsibility for Recitals, Etc. ------------------------------------ The recitals contained herein and in the Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Securities or the proceeds of any Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. The Trustee shall not be charged with knowledge of any default or Event of Default under Section 5.1(a) or (b) relating to Other Debentures unless (i) a Responsible Officer of the Trustee assigned to its Principal Office shall have actual knowledge thereof or (ii) the Company, any Securityholder or the holder of any Other Debenture shall have given the Trustee written notice thereof in accordance with Section 13.4. SECTION 6.4. Trustee, Authenticating Agent, Paying Agents, Transfer ------------------------------------------------------ Agents or Registrar May Own Securities. -------------------------------------- The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Security registrar, in its individual or any other capacity, may become the owner or pledgee of Securities with the 27 same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Security registrar. SECTION 6.5. Monies to be Held in Trust. -------------------------- Subject to the provisions of Section 11.4, all monies received by the Trustee or any paying agent, until used or applied as herein provided, shall be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such monies shall be paid from time to time upon the written order of the Company, signed by the Chairman of the Board of Directors, the President or a Vice President or the Treasurer or an Assistant Treasurer of the Company. SECTION 6.6. Compensation and Expenses of Trustee. ------------------------------------ The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee) incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. The obligations of the Company under this Section 6.6 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.1(d) or Section 5.1(e), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 6.7. Officers' Certificate as Evidence. --------------------------------- Except as otherwise provided in Sections 6.1 and 6.2, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof is herein specifically prescribed), in the absence of negligence or bad faith on the part of the Trustee, may be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant 28 to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.8. Conflicting Interest of Trustee. ------------------------------- If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the Company shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act, subject to the penultimate paragraph thereof. SECTION 6.9. Eligibility of Trustee. ---------------------- The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person permitted to act as trustee by the Commission authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least ____ million U.S. dollars ($__________) and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.9 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.9, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. SECTION 6.10. Resignation or Removal of Trustee. --------------------------------- (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 60 days after the mailing of such notice of resignation to the Company, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide holder of a Security for at least six months may, subject to the provisions of Section 5.9, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur, (i) the Trustee shall fail to comply with the provisions of Section 6.8 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Security or Securities for at least six months, (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.9 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or 29 (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.9, any Securityholder who has been a bona fide holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Securities at the time outstanding may at any time remove the Trustee and nominate a successor trustee, which shall be deemed appointed as successor trustee unless within 10 days after such nomination the Company objects thereto or if no successor trustee shall have been so appointed and shall have accepted appointment within 30 days after such removal, in which case the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.10 provided, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11. Acceptance by Successor Trustee. ------------------------------- Any successor trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act, upon payment of any amounts then due it pursuant to the provisions of Section 6.6, shall execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring trustee thereunder. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act, nevertheless, shall retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. No successor trustee shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9. Upon acceptance of appointment by a successor trustee as provided in this Section 6.11, the Company shall mail notice of the succession of such trustee hereunder to the holders of Securities at their addresses as they shall appear on the Security register. If the Company fails to mail such notice within 10 30 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 6.12. Succession by Merger, Etc. -------------------------- Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which the Securities or this Indenture elsewhere provides that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13. Limitation on Rights of Trustee as a Creditor. --------------------------------------------- The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent included therein. SECTION 6.14. Authenticating Agents. --------------------- There may be one or more Authenticating Agents appointed by the Trustee with power to act on its behalf and subject to its direction in the authentication and delivery of Securities issued upon exchange or transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Securities; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Securities. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $________ and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.14 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent 31 hereunder, if such successor corporation is otherwise eligible under this Section 6.14 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.14, the Trustee may promptly appoint a successor Authenticating Agent eligible under this Section 6.14, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all Securityholders as the names and addresses of such holders appear on the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.1. Action by Securityholders. ------------------------- Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders. If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or to revoke any such action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the Outstanding Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. 32 SECTION 7.2. Proof of Execution by Securityholders. ------------------------------------- Subject to the provisions of Section 6.1, 6.2 and 8.5, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Securities shall be proved by the Security Register or by a certificate of the Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.6. SECTION 7.3. Who Are Deemed Absolute Owners. ------------------------------ Prior to due presentment for registration of transfer of any Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Security registrar may deem the person in whose name such Security shall be registered upon the Security Register to be, and may treat him as, the owner of such Security (whether or not such Security shall be overdue) for the purpose of receiving payment of or on account of the principal of and premium, if any, and (subject to Section 2.5) interest on such Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Security. SECTION 7.4. Securities Owned by Company Deemed Not Outstanding. -------------------------------------------------- In determining whether the holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Company or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Securities which the Trustee actually knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Securities and that the pledgee is not the Company or any such other obligor or person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.5. Revocation of Consents; Future Holders Bound. -------------------------------------------- At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Securities specified in this Indenture in connection with such action, any holder of a Security (or any Security issued in whole or in part in exchange or substitution therefor), subject to Section 7.1, the serial number of which is shown by the evidence to be included in the Securities the holders of which have consented to such action may, by filing written notice with the Trustee at its Principal Office and upon proof of holding as provided in Section 7.2, revoke such action so far as concerns such Security (or so far as concerns the principal amount represented by any exchanged or substituted Security). Except as aforesaid any such action taken by the 33 holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security, and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor. ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.1. Purposes of Meetings. -------------------- A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.2; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Securities under any other provision of this Indenture or under applicable law. SECTION 8.2. Call of Meetings by Trustee. --------------------------- The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.1, to be held at such time and at such place in ___________________, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Securities at their addresses as they shall appear on the Securities Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.3. Call of Meetings by Company or Securityholders. ---------------------------------------------- In case at any time the Company pursuant to a resolution of the Board of Directors, or the holders of at least 10% in aggregate principal amount of the Securities then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in said ________________ for such meeting and may call such meeting to take any action authorized in Section 8.1, by mailing notice thereof as provided in Section 8.2. 34 SECTION 8.4. Qualifications for Voting. ------------------------- To be entitled to vote at any meeting of Securityholders a person shall (a) be a holder of one or more Securities or (b) be a person appointed by an instrument in writing as proxy by a holder of one or more Securities. The only persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.5. Regulations. ----------- Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee, by an instrument in writing, shall appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.3, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 8.4, at any meeting each holder of Securities or proxy therefor shall be entitled to one vote for each $__ principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.2 or 8.3 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. The Persons entitled to vote a majority in principal amount of the outstanding Securities shall constitute a quorum for a meeting of holders of Securities; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in principal amount of the outstanding Securities, the Persons holding or representing such specified percentage in principal amount of the outstanding Securities will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting, if convened at the request of holders of Securities, shall be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.2, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the outstanding Securities which shall constitute a quorum. 35 Except as limited by the first proviso to the first paragraph of Section 9.2, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of a majority in principal amount of the outstanding Securities; provided, however, that, except as limited by the first proviso to the first paragraph of Section 9.2, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be given by the holders of not less than a specified percentage in principal amount of the outstanding Securities may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of not less than such specified percentage in principal amount of the outstanding Securities. Any resolution passed or decision taken at any meeting of holders of Securities duly held in accordance with this Section shall be binding on all the holders of Securities whether or not present or represented at the meeting. SECTION 8.6. Voting. ------ The vote upon any resolution submitted to any meeting of holders of Securities shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.2. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. The holders of Securities shall vote or consent for all purposes as a single class. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ARTICLE IX AMENDMENTS SECTION 9.1. Without Consent of Securityholders. ---------------------------------- The Company and the Trustee may from time to time and at any time amend the Indenture, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article X hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the Securityholders as the Board of Directors and the Trustee shall consider to be for the protection of the Securityholders, and to make the occurrence, or the occurrence and continuance, of a 36 default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such amendment may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to provide for the issuance under this Indenture of Securities in physical form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with the Securities issued hereunder in fully registered form and to make all appropriate changes for such purpose; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not materially adversely affect the interests of the holders of the Securities; (e) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities; (f) to make provision for transfer procedures, certification, book-entry provisions, and all other matters required pursuant to Section 2.6 or otherwise necessary, desirable or appropriate in connection with the issuance of Securities to holders of Capital Securities in the event of a distribution of Securities by LFC Trust following a Dissolution Event; (g) to qualify or maintain qualification of this Indenture under the Trust Indenture Act; or (h) to make any change that does not adversely affect the rights of any Securityholder in any material respect. The Trustee is hereby authorized to join with the Company in the execution of any supplemental indenture to effect such amendment, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any amendment to the Indenture authorized by the provisions of this Section 9.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 9.2. SECTION 9.2. With Consent of Securityholders. ------------------------------- With the consent (evidenced as provided in Section 7.1) of the holders of a majority in aggregate principal amount of the Securities at the time outstanding, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time amend the Indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such amendment shall without the consent of the holders of each Security then outstanding and affected thereby (i) extend the Maturity Date of any Security, or reduce the rate or extend the time of payment of interest thereon (except as contemplated by Article XVI), or reduce the principal amount thereof, or reduce any 37 amount payable on prepayment thereof, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Securities, or impair or affect the right of any Securityholder to institute suit for payment thereof, or (ii) reduce the aforesaid percentage of Securities the holders of which are required to consent to any such amendment to the Indenture, provided, however, that if the Securities are held by LFC Trust, such amendment shall not be effective until the holders of a majority in liquidation amount of Trust Securities shall have consented to such amendment; and provided, further, that if the consent of the holder of each outstanding Security is required, such amendment shall not be effective until each holder of the Trust Securities shall have consented to such amendment. Upon the request of the Company accompanied by a copy of a Board Resolution authorizing the execution of any supplemental indenture affecting such amendment, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.3. Compliance with Trust Indenture Act; Effect of ---------------------------------------------- Supplemental Indentures. ----------------------- Any supplemental indenture executed pursuant to the provisions of this Article IX shall comply with the Trust Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.4. Notation on Securities. ---------------------- Securities authenticated and delivered after the execution of any supplemental indenture affecting such Securities pursuant to the provisions of this Article IX may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Securities then outstanding. 38 SECTION 9.5. Evidence of Compliance of Supplemental Indenture to be ------------------------------------------------------ Furnished to the Trustee. ------------------------ The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof. ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 10.1. Company May Consolidate, Etc., on Certain Terms. ----------------------------------------------- Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company, as the case may be), or successive consolidations or mergers in which the Company, or its successor or successors, as the case may be, shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Company, or its successor or successors, as the case may be, as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Company, or its successor or successors, as the case may be) authorized to acquire and operate the same; provided, that (a) the Company is the surviving Person, or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, conveyance, transfer or lease of property is made is a Person organized and existing under the laws of the United States or any State thereof or the District of Columbia, and (b) upon any such consolidation or merger in which the Company is not the surviving Person or any such sale, conveyance, transfer or lease of the property of the Company as an entirety, or substantially as an entirety, to any other Person, the due and punctual payment of the principal of (and premium, if any) and interest on the Securities according to their tenor and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company shall be expressly assumed, by supplemental indenture (which shall conform to the provisions of the Trust Indenture Act, as then in effect) satisfactory in form to the Trustee executed and delivered to the Trustee by the Person formed by such consolidation, or into which the Company shall have been merged, or by the Person which shall have acquired such property, as the case may be, and (c) after giving effect to such consolidation, merger, sale, conveyance, transfer or lease, no Default or Event of Default shall have occurred and be continuing. SECTION 10.2. Successor Corporation to be Substituted for Company. --------------------------------------------------- In case of any such consolidation, merger, conveyance or transfer and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor Person shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, and the Company thereupon shall be relieved of any further liability or obligation hereunder or upon the Securities. Such successor Person thereupon may cause to be signed, and may issue either in its own name or in the name of LIFE Financial Corporation, any or all of the Securities issuable 39 hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor Person instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee or the Authenticating Agent for authentication, and any Securities which such successor Person thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Indentures had been issued at the date of the execution hereof. SECTION 10.3. Opinion of Counsel to be Received by Trustee. -------------------------------------------- The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or lease, and any assumption, permitted or required by the terms of this Article X complies with the provisions of this Article X. The Trustee is not obligated to receive such an Opinion of Counsel in any case. ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE SECTION 11.1. Discharge of Indenture. ---------------------- When (a) the Company shall deliver to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced as provided in Section 2.7) and not theretofore canceled, or (b) all the Securities not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for prepayment within one year under arrangements satisfactory to the Trustee for the giving of notice of prepayment, and the Company shall deposit with the Trustee, in trust, funds sufficient to pay on the Maturity Date or upon prepayment all of the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced as provided in Section 2.7) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to the Maturity Date or prepayment date, as the case may be, but excluding, however, the amount of any monies for the payment of principal of or premium, if any, or interest on the Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 11.4, or (2) paid to any State or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.2, 2.6, 2.7, 3.1, 3.2, 3.4, 6.6, 6.10 and 11.4 hereof, which shall survive until such Securities shall mature and be paid. Thereafter, Sections 6.6, 6.10 and 11.4 shall survive, and the Trustee, on demand of the Company accompanied by any Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; provided that the Company hereby agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Securities. SECTION 11.2. Deposited Monies and U.S. Government Obligations to be Held ------------------------------------------------------------ in Trust by Trustee. ------------------- Subject to the provisions of Section 11.4, all monies and U.S. Government Obligations deposited with the Trustee pursuant to Sections 11.1 or 11.5 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the 40 holders of the particular Securities for the payment of which such monies or U.S. Government Obligations have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 11.5 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the holders of outstanding Securities. SECTION 11.3. Paying Agent to Repay Monies Held. --------------------------------- Upon the satisfaction and discharge of this Indenture all monies then held by any paying agent of the Securities (other than the Trustee), upon written demand of the Company, shall be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. SECTION 11.4. Return of Unclaimed Monies. -------------------------- Any monies deposited with or paid to the Trustee or any paying agent for payment of the principal of or premium, if any, or interest on Securities and not applied but remaining unclaimed by the holders of Securities for two years after the date upon which the principal of or premium, if any, or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent on Company Request; and the holder of any of the Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such paying agent with respect to such monies shall thereupon cease. SECTION 11.5. Defeasance Upon Deposit of Monies or U.S. Government ----------------------------------------------------- Obligations. ----------- The Company shall be deemed to have been Discharged (as defined below) from its obligations with respect to the Securities on the 91st day after the conditions set forth below have been satisfied: (a) The Company shall have deposited or caused to be deposited irrevocably with the Trustee or the Defeasance Agent (as defined below) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee and the Defeasance Agent, if any, to pay and discharge each installment of principal of and interest and premium, if any, on the outstanding Securities on the dates such installments of principal, interest or premium are due; (b) if the Securities are then listed on any national securities exchange or quoted on the National Market System of the Nasdaq Stock Market, the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that the exercise of the option under this Section 11.5 would not cause such Securities to be delisted or removed from such exchange or quotation system; 41 (c) no Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit; (d) the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that holders of the Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of the exercise of the option under this Section 11.5 and will be subject to United States federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised, and such opinion shall be based on a statute so providing or be accompanied by a private letter ruling to that effect received from the United States Internal Revenue Service or a revenue ruling pertaining to a comparable form of transaction to that effect published by the United States Internal Revenue Service; and (e) the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Officers' Certificate stating that in the opinion of the signers all conditions precedent provided for in this Section 11.5 have been compiled with. "Discharged" means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities and to have satisfied all the obligations under this Indenture relating to the Securities (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except (A) the rights of holders of Securities to receive, from the trust fund described in clause (1) above, payment of the principal of and the interest and premium, if any, on the Securities when such payments are due; (B) the Company's obligations with respect to the Securities under Sections 2.2, 2.6, 2.7, 3.2, 3.4, 6.10 and 11.4; and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder. "Defeasance Agent" means another financial institution which is eligible to act as Trustee hereunder and which assumes all of the obligations of the Trustee necessary to enable the Trustee to act under this Article. In the event such a Defeasance Agent is appointed pursuant to this Section, the following conditions shall apply: (a) The Trustee shall have approval rights over the document appointing such Defeasance Agent and the document setting forth such Defeasance Agent's rights and responsibilities; and (b) The Defeasance Agent shall provide verification to the Trustee acknowledging receipt of sufficient money and/or U.S. Government Obligations to meet the applicable conditions set forth in this Section 11.5. ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.1. Indenture and Securities Solely Corporate Obligations. ----------------------------------------------------- No recourse for the payment of the principal of or premium, if any, or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor Person to the Company, either directly or through the Company or any successor Person to the Company, whether by virtue of any constitution, statute 42 or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.1. Successors. ---------- All the covenants, stipulations, promises and agreements in this Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. SECTION 13.2. Official Acts by Successor Corporation. -------------------------------------- Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 13.3. Surrender of Company Powers. --------------------------- The Company by instrument in writing executed by authority of 2/3 (two- thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company, as the case may be, and as to any successor Person. SECTION 13.4. Addresses for Notices, Etc. --------------------------- Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities on the Company may be given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for the purpose) to the Company, 10540 North Magnolia Avenue, Unit B, Riverside, California 92505, Attention: Chief Executive Officer. Any notice, direction, request or demand by any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, Two International Place, Boston, Massachusetts 02110, Attention: Corporate Trustee Administration Department (unless another address is provided by the Trustee to the Company for the purpose). Any notice or communication to a holder shall be mailed by first class mail to his or her address shown on the register kept by the Registrar. Failure to mail a notice or communication to a holder or any defect in it shall not affect its sufficiency with respect to other holders. SECTION 13.5. Governing Law. ------------- This Indenture and each Security shall be deemed to be a contract made under the laws of the State of Delaware, and for all purposes shall be governed by and construed in accordance with the laws of said State, without regard to conflicts of laws principles thereof. 43 SECTION 13.6. Evidence of Compliance with Conditions Precedent. ------------------------------------------------ Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture (except pursuant to Section 3.5) shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 13.7. Business Days. ------------- In any case where the date of payment of principal of or premium, if any, or interest on the Securities will not be a Business Day, the payment of such principal of or premium, if any, or interest on the Securities need not be made on such date but may be made on the next succeeding Business Day, except that if such next succeeding Business Day falls in the next succeeding Calendar Year, such payment shall be made on the immediately preceding Business Day, with the same force and effect as if made on the date of payment and no interest shall accrue for the period from and after such date. SECTION 13.8. Trust Indenture Act to Control. ------------------------------ If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 13.9. Table of Contents, Headings, Etc. --------------------------------- The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 13.10. Execution in Counterparts. ------------------------- This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 13.11. Separability. ------------ In case any one or more of the provisions contained in this Indenture or in the Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of the Securities, but this Indenture and the Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. 44 SECTION 13.12. Assignment. ---------- The Company will have the right at all times to assign any of its respective rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain primarily liable for all its obligations. Subject to the foregoing, the Indenture is binding upon and inures to the benefit of the parties thereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. SECTION 13.13. Acknowledgment of Rights. ------------------------ The Company acknowledges that, with respect to any Securities held by LFC Trust or a trustee of such trust, if the Property Trustee of such Trust fails to enforce its rights under this Indenture as the holder of the Securities held as the assets of LFC Trust, any holder of Capital Securities may institute, to the fullest extent permitted by law, legal proceedings directly against the Company to enforce such Property Trustee's rights under this Indenture without first instituting any legal proceedings against such Property Trustee or any other person or entity. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay principal of or premium, if any, or interest on the Securities when due, the Company acknowledges that a holder of Capital Securities may directly institute a proceeding for enforcement of payment to such holder of the principal of or premium, if any, or interest on the Securities having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such holder on or after the respective due date specified in the Securities. ARTICLE XIV PREPAYMENT OF SECURITIES -- MANDATORY AND OPTIONAL SINKING FUND SECTION 14.1. Special Event Repayment. ----------------------- If a Special Event has occurred and is continuing then, notwithstanding Section 14.2(a) but subject to Section 14.2(c), the Company shall have the right at any time prior to the Initial Optional Prepayment Date, upon (i) not less than 45 days written notice to the Trustee, which notice shall be accompanied by an Officers' Certificate certifying that a Special Event entitling the Company to prepay the Securities pursuant to this Section, has occurred and (ii) not less than 30 days nor more than 60 days written notice to the Securityholders, to prepay the Securities, in whole, but not in part, within 90 days following the occurrence of such Special Event at the Special Event Prepayment Price. The Special Event Prepayment Price shall be paid prior to 12:00 noon, New York time, on the date of such prepayment or such earlier time as the Company determines, provided that the Company shall deposit with the Trustee an amount sufficient to pay the Special Event Prepayment Price by 10:00 a.m., New York time, on the date such Special Event Prepayment Price is to be paid. The Company shall provide the Trustee with written notice of the Special Event Prepayment Price promptly after the calculation thereof, which notice shall include any calculation made in connection with the determination of the Special Event Prepayment Price. SECTION 14.2. Optional Prepayment by Company. ------------------------------ (a) Subject to the provisions of this Article XIV, including but not limited to Section 14.2(c), the Company shall have the right to prepay the Securities, in whole or in part, from time to time, on or after the Initial Optional Prepayment Date at an optional prepayment price (the "Optional Prepayment Price") equal to the percentage of the outstanding principal amount of the Securities specified below, plus, in each case, accrued interest thereon (including Additional Interest and Compounded Interest, if any) to the applicable date of prepayment: On or after _________, __________: 100.000%. 45 If the Securities are only prepaid redeemed pursuant to this Section 14.2, the Securities will be prepaid by lot or by any other method utilized by the Trustee; provided, that if at the time of prepayment the Securities are registered as a Global Security, the Depositary shall determine, in accordance with its procedures, the principal amount of such Securities held for the account of its participants to be prepaid. The Optional Prepayment Price shall be paid prior to 12:00 noon, New York time, on the date of such prepayment or at such earlier time as the Company determines, provided that the Company shall deposit with the Trustee an amount sufficient to pay the Optional Prepayment Price by 10:00 a.m., New York time, on the date such Optional Prepayment Price is to be paid. (b) Notwithstanding the first sentence of Section 14.2, upon the entry of an order for dissolution of LFC Trust by a court of competent jurisdiction, the Securities thereafter will be subject to optional prepayment, in whole only, but not in part, on or after ___________________, at the Optional Prepayment Price and otherwise in accordance with this Article XIV. (c) Any prepayment of Securities pursuant to Section 14.1 or Section 14.2 shall be subject to the receipt by the Company of any required regulatory approval, if then required. SECTION 14.3. No Sinking Fund. --------------- The Securities are not entitled to the benefit of any sinking fund. SECTION 14.4. Notice of Prepayment; Selection of Securities. --------------------------------------------- In case the Company shall desire to exercise the right to prepay all, or, as the case may be, any part of the Securities in accordance with their terms, it shall fix a date for prepayment and shall mail a notice of such prepayment at least 30 and not more than 60 days prior to the date fixed for prepayment to the holders of Securities so to be prepaid as a whole or in part at their last addresses as the same appear on the Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Security designated for prepayment as a whole or in part shall not affect the validity of the proceedings for the prepayment of any other Security. Each such notice of prepayment shall specify the CUSIP number of the Securities to be prepaid, the date fixed for prepayment, the Prepayment Price at which the Securities are to be prepaid (or the method by which such Prepayment Price is to be calculated), the place or places of payment, that payment will be made upon presentation and surrender of the Securities, that interest accrued to the date fixed for prepayment will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be prepaid will cease to accrue. If less than all the Securities are to be prepaid the notice of prepayment shall specify the numbers of the Securities to be prepaid. In case any Security is to be prepaid in part only, the notice of prepayment shall state the portion of the principal amount thereof to be prepaid and shall state that on and after the date fixed for prepayment, upon surrender of such Security, a new Security or Securities in principal amount equal to the portion thereof not prepaid will be issued. By 10:00 a.m. New York time on the prepayment date specified in the notice of prepayment given as provided in this Section, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to prepay on the prepayment date all the Securities so called for prepayment at the appropriate Prepayment Price, together with accrued interest to the date fixed for prepayment. 46 The Company will give the Trustee notice not less than 45 days prior to the prepayment date as to the aggregate principal amount of Securities to be prepaid and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Securities or portions thereof to be prepaid. SECTION 14.5. Payment of Securities Called for Prepayment. ------------------------------------------- If notice of prepayment has been given as provided in Section 14.4, the Securities or portions of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable Prepayment Price, together with interest accrued to the date fixed for prepayment (subject to the rights of holders of Securities on the close of business on a regular record date in respect of an Interest Payment Date occurring on or prior to the prepayment date), and on and after said date (unless the Company shall default in the payment of such Securities at the Prepayment Price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for prepayment shall cease to accrue. On presentation and surrender of such Securities at a place of payment specified in said notice, the said Securities or the specified portions thereof shall be prepaid by the Company at the applicable Prepayment Price, together with interest accrued thereon to the date fixed for prepayment (subject to the rights of holders of Securities on the close of business on a regular record date in respect of an Interest Payment Date occurring on or prior to the prepayment date). Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Security or Securities in principal amount equal to the portion of the Security so presented not prepaid. ARTICLE XV SUBORDINATION OF SECURITIES SECTION 15.1. Agreement to Subordinate. ------------------------ The Company covenants and agrees, and each holder of Securities issued hereunder likewise covenants and agrees, that the Securities shall be issued subject to the provisions of this Article XV; and each holder of a Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, premium, if any, and interest on all Securities issued hereunder, to the extent and in the manner hereinafter set forth, shall be subordinated and junior in right of payment to the prior payment in full of all Allocable Amounts with respect to Senior Indebtedness, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XV shall prevent the occurrence of any Default or Event of Default hereunder. SECTION 15.2. Default on Senior Indebtedness. ------------------------------ In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness, or in the event that the maturity of any Senior Indebtedness has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the principal (including prepayments) of or premium, if any, or interest on the Securities. 47 In the event of the acceleration of the maturity of the Securities, then no payment shall be made by the Company with respect to the principal (including prepayments) of or premium, if any, or interest on the Securities until the holders of all Senior Indebtedness outstanding at the time of such acceleration shall receive payment in full of all Allocable Amounts due in respect of such Senior Indebtedness (including any amounts due upon acceleration). In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraphs of this Section 15.2, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing, within 90 days of such payment of the Allocable Amounts then due and owing on such Senior Indebtedness and only the Allocable Amounts specified in such notice to the Trustee shall be paid to the holders of such Senior Indebtedness. SECTION 15.3. Liquidation; Dissolution; Bankruptcy. ------------------------------------ Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all Allocable Amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company on account of the principal (and premium, if any) or interest on the Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under the Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective Allocable Amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Allocable Amounts in respect of such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Allocable Amounts in respect of Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Allocable Amounts in respect of such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. 48 For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Securities to the payment of Senior Indebtedness that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the sale, conveyance, transfer or lease of its property as an entirety, or substantially as an entirety, to another Person upon the terms and conditions provided for in Article X of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.3 if such other Person, as a part of such consolidation, merger, sale, conveyance, transfer or lease, shall comply with the conditions stated in Article X of this Indenture. SECTION 15.4. Subrogation. ----------- Subject to the payment in full of all Allocable Amounts in respect of Senior Indebtedness, the rights of the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, as the case may be, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Securities, be deemed to be a payment by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness on the other hand. Nothing contained in this Article XV or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Securities and creditors of the Company, as the case may be, other than the holders of Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Trustee or the holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under the Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. SECTION 15.5. Trustee to Effectuate Subordination. ----------------------------------- Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. 49 SECTION 15.6. Notice by the Company. --------------------- The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee assigned to its Principal Office shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor or representative thereof; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 15.6 at least two Business Days prior to the date (i) upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Security), or (ii) monies and/or U.S. Government Obligations are deposited in trust pursuant to Article XI then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and U.S. Government Obligations and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness of the Company (or a trustee or representative on behalf of such holder) to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee and the Securityholders shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. SECTION 15.7. Rights of the Trustee; Holders of Senior Indebtedness. ----------------------------------------------------- The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. 50 With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6. SECTION 15.8. Subordination May Not Be Impaired. --------------------------------- No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. ARTICLE XVI EXTENSION OF INTEREST PAYMENT PERIOD SECTION 16.1. Extension of Interest Payment Period. ------------------------------------ So long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest by extending the interest payment period of such Securities for a period not exceeding 20 consecutive quarters, including the first such quarter during such extension period (the "Extension Period"), during which Extension Period no interest shall be due and payable; provided that no Extension Period shall end on a date other than an Interest Payment Date or extend beyond the Maturity Date. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 16.1, will bear interest thereon at the Coupon Rate compounded quarterly, to the extent permitted by applicable law, for each quarter of the Extension Period ("Compounded Interest"). At the end of the Extension Period, the Company shall pay all interest accrued and unpaid on the Securities, including any Additional Interest and Compounded Interest (together, "Deferred Interest") that shall be payable to the holders of the Securities in whose names the Securities are registered in the Security Register 51 on the first record date preceding the end of the Extension Period. Before the termination of any Extension Period, the Company may further defer payments of interest by further extending such period, provided that such period, together with all such previous and further extensions within such Extension Period, shall not exceed 20 consecutive quarters, including the first such quarter during such Extension Period, or extend beyond the Maturity Date. Upon the termination of any Extension Period and the payment of all Deferred Interest then due, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest shall be due and payable during an Extension Period, except at the end thereof, but the Company may prepay at any time all or any portion of the interest accrued during an Extension Period. SECTION 16.2. Notice of Extension. ------------------- (a) If the Property Trustee is the only registered holder of the Securities at the time the Company selects an Extension Period, the Company shall give written notice to the Administrators, the Property Trustee and the Trustee of its selection of such Extension Period five Business Days before the earlier of (i) the next succeeding date on which Distributions on the Trust Securities issued by LFC Trust are payable, or (ii) the date LFC Trust is required to give notice of the record date, or the date such Distributions are payable, to any national securities exchange or to holders of the Capital Securities issued by LFC Trust, but in any event at least five Business Days before such record date. (b) If the Property Trustee is not the only holder of the Securities at the time the Company selects an Extension Period, the Company shall give the holders of the Securities and the Trustee written notice of its selection of such Extension Period at least 10 Business Days before the earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the Company is required to give notice of the record or payment date of such interest payment to any national securities exchange. (c) The quarter in which any notice is given pursuant to paragraphs (a) or (b) of this Section 16.2 shall be counted as one of the 20 quarters permitted in the maximum Extension Period permitted under Section 16.1. ARTICLE XVII CONVERSION OF SECURITIES SECTION 17.1. Conversion Rights. ----------------- Subject to and upon compliance with the provisions of this Article XVII, the Securities are convertible, at the option of the holder, at any time on or before 5:00 p.m. (Eastern time) on the earlier of (i) the Business Day immediately preceding the date of repayment of such Securities, whether at maturity or upon prepayment, and (ii) the Conversion Termination Date of the Securities, into fully paid and nonassessable shares of Common Stock at a conversion rate of _______ shares of Common Stock for each Security (equivalent to a conversion price of $______ per share of Common Stock), subject to adjustment as described in this Article XVII (as so adjusted, the "Conversion Price"). A holder of Securities may convert any portion of the principal amount of the Securities into that number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) obtained by dividing the principal amount of the Securities to be converted by the Conversion Price. In case a Security or portion thereof is called for prepayment, such conversion right in respect of the Security or portion so 52 called shall expire at 5:00 p.m. (Eastern time) on the Business Day immediately preceding the corresponding Prepayment Date, unless the Company defaults in making the payment due upon prepayment. SECTION 17.2. Conversion Procedures. --------------------- (a) To convert all or a portion of the Securities, the holder thereof shall deliver to the Conversion Agent an irrevocable Notice of Conversion Request setting forth the principal amount of Securities to be converted, together with the name or names, if other than the holder, in which the shares of Common Stock should be issued upon conversion and, if such Securities are definitive Securities, surrender to the Conversion Agent the Securities to be converted, duly endorsed or assigned to the Company or in blank. In addition, a holder of Capital Securities may exercise its right under the Declaration to exchange such Capital Securities into Securities which will be converted into Common Stock by delivering to the Conversion Agent an irrevocable Conversion Request setting forth the information called for by the preceding sentence and directing the Conversion Agent (i) to exchange such Capital Security for a portion of the Securities held by the LFC Trust (at an exchange rate of $__ principal amount of Securities for each Capital Security) and (ii) to immediately convert such Securities, on behalf of such holder, into Common Stock pursuant to this Article XVII and, if such Capital Securities are in definitive form, surrendering such Capital Securities, duly endorsed or assigned to the Company or in blank. So long as any Capital Securities are outstanding, LFC Trust shall not convert any Securities except pursuant to a Conversion Request delivered to the Conversion Agent by a holder of Capital Securities. Holders of Securities at 5:00 p.m. (Eastern time) on a record date for a Interest Payment Date will be entitled to receive the interest payable on such Securities on the corresponding Interest Payment Date notwithstanding the conversion of such Securities following such record date but on or prior to such Interest Payment Date. Except as provided in the immediately preceding sentence, the Company will not make, or be required to make, any payment, allowance or adjustment for accumulated and unpaid interest, whether or not in arrears, on converted Securities; provided, however, that if notice of prepayment of Securities is mailed or otherwise given to holders of Securities or the LFC Trust issues a press release announcing a Conversion Termination Date, then, if any holder of Securities converts any Securities into Common Stock on any date on or after the date on which such notice of prepayment is mailed or otherwise given or the date of such press release, as the case may be, and if such date of conversion falls on any day from and including the first day of an Extension Period and on or prior to the Interest Payment Date upon which such Extension Period ends, such converting holder shall be entitled to receive either (i) if the date of such conversion falls after a record date and on or prior to the next succeeding Interest Payment Date, all accrued and unpaid interest on such Securities (including interest thereon, if any, to the extent permitted by applicable law) to such Interest Payment Date or (ii) if the date of such conversion does not fall on a date described in clause (i) above, all accrued and unpaid interest on such Securities (including interest thereon, if any, to the extent permitted by applicable law) to the most recent Interest Payment Date prior to the date of such conversion, which interest shall, in either such case, be paid to such converting holder unless the date of conversion of such Securities is on or prior to the Interest Payment Date upon which such Extension Period ends and after the record date for such Interest Payment Date, in which case such interest shall be paid to the person who was the holder of such Securities (or one or more predecessor Securities) at 5:00 p.m. (Eastern time) on such record date. Except as otherwise set forth above in this paragraph, in the case of any Security which is converted, interest whose Stated Maturity is after the date of conversion of such Security shall not be payable, and the Company shall not make nor be required to make any other payment, adjustment or allowance with respect to accrued but unpaid interest (including Compounded Interest and Additional Interest, if any) on the Securities being converted, which shall be deemed to be paid in full. If any Security called for prepayment is converted, any money deposited with the Trustee or with any paying agent or so segregated and held in trust for the prepayment of such Security shall (subject to say right of the holder of 53 such Security or any Predecessor Security to receive interest as provided in this Indenture) be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. Each conversion shall be deemed to have been effected immediately prior to 5:00 p.m. (Eastern time) on the day on which the Notice of Conversion was received (the "Conversion Date") by the Conversion Agent from the Securityholder or from a holder of the Capital Securities effecting a conversion thereof pursuant to its conversion rights under the Declaration, as the case may be. The Person or Persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as a record holder or holders of such Common Stock as of the Conversion Date. As promptly as practicable on or after the Conversion Date, the Company shall issue and deliver at the office of the Conversion Agent, unless otherwise directed by the Securityholder in the Notice of Conversion, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion, together with the cash payment, if any, in lieu of any fraction of any share to the Person or Persons entitled to receive the same. The Conversion Agent shall deliver such certificate or certificates to each Person or Persons. (b) Subject to any right of the holder of such Security or any Predecessor Security to receive interest as provided in Section 17.2(a), the Company's delivery upon conversion of the fixed number of shares of Common Stock into which the Securities are convertible (together with the cash payment, if any, in lieu of fractional shares) shall be deemed to satisfy the Company's obligation to pay the principal amount at maturity of the portion of Securities so converted and any unpaid interest (including Compounded Interest and Additional Interest, if any) accrued on such Securities at the time of such conversion. (c) No fractional shares of Common Stock will be issued as a result of conversion, but in lieu thereof, the Company shall pay to the Conversion Agent a cash adjustment in an amount equal to the same fraction of the Closing Price of such fractional interest on the date on which the Securities or Capital Securities, as the case may be, were duly surrendered to the Conversion Agent for conversion, or, if such day is not a Trading Day, on the next Trading Day, and the Conversion Agent in turn will make such payment, if any, to the holder of the Securities or the holder of the Capital Securities so converted. (d) In the event of the conversion of any Security in part only, a new Security or Securities for the unconverted portion thereof will be issued in the name of the holder thereof upon the cancellation thereof in accordance with Section 2.7. (e) In effecting the conversion transactions described in this Section, the Conversion Agent is acting as agent of the holders of Capital Securities (in the exchange of Capital Securities for Securities) and as agent of the holders of Securities (in the conversion of Securities into Common Stock), as the case may be, directing it to effect such conversion transactions. The Conversion Agent is hereby authorized (i) to exchange Capital Securities for Securities held by LFC Trust from time to time in connection with the conversion of such Capital Securities in accordance with this Article XVII and (ii) to convert all or a portion of the Securities into Common Stock and thereupon to deliver such shares of Common Stock in accordance with the provisions of this Article XVII and to deliver to the LFC Trust a new Security or Securities for any resulting unconverted principal amount. (f) The Company shall pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities and the delivery of shares of Common Stock by the Trust to the Holder upon conversion. The Company shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the Securities so converted were registered, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Trust the amount of any such tax or has established to the satisfaction of the Trust that such tax has been paid. 54 SECTION 17.3. Conversion Price Adjustments. ---------------------------- The conversion price shall be subject to adjustment (without duplication) from time to time as follows: (a) In case the Company shall, while any of the Securities are outstanding, (i) pay a dividend or make a distribution with respect to its Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its shares of Common Stock any shares of capital stock of the Company, the Conversion Price in effect immediately prior to such action shall be adjusted so that the holder of any Securities thereafter surrendered for conversion shall be entitled to receive the number of shares of capital stock of the Company which he would have owned immediately following such action had such Securities been converted immediately prior thereto. An adjustment made pursuant to this Section 17.3(a) shall become effective immediately after the record date in the case of a dividend or other distribution and shall become effective immediately after the effective date in case of a subdivision, combination or reclassification (or immediately after the record date if a record date shall have been established for such event). If, as a result of an adjustment made pursuant to this Section 17.3(a), the holder of any Security thereafter surrendered for conversion shall become entitled to receive shares of two or more classes or series of capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a resolution of the Board of Directors filed with the Trustee) shall determine the allocation of the adjusted Conversion Price between or among shares of such classes or series of capital stock. (b) In case the Company shall, while any of the Securities are outstanding, issue rights or warrants to all holders of its Common Stock entitling them (for a period expiring within 45 days after the record date mentioned in this Section 17.3(b)) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price per share of Common Stock (as defined in 17.3(f) below) on such record date, the Conversion Price for the Securities shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of issuance of such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such Current Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. For the purposes of this subsection, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not issue any rights or warrants in respect of the shares of Common Stock held in the treasury of the Company. In case any rights or warrants referred to in this subsection in respect of which an adjustment shall have been made shall expire unexercised within 45 days after the same shall have been distributed or issued by the Company, the Conversion Price shall be readjusted at the time of such expiration to the Conversion Price that would have been in effect if no adjustment had been made on account of the distribution or issuance of such expired rights or warrants. (c) Subject to the last sentence of this Section 17.3(c), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class or series of capital stock, cash or assets (including securities, but excluding any rights or warrants referred to in Section 17.3(b), any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in Section 17.3 (a)), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by Section 17.3(c) by a fraction of which the numerator shall be 55 the Current Market Price per share of the Common Stock on the date fixed for the payment of such distribution (the "Reference Date") less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors), on the Reference Date, of the portion of the evidences of indebtedness, shares of capital stock, cash and assets so distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following the Reference Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not occurred. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 17.3(c) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price per share of Common Stock. For purposes of this Section 17.3(c), any dividend or distribution that includes shares of Common Stock or rights or warrants to subscribe for or purchase shares of Common Stock shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, shares of capital stock, cash or assets other than such shares of Common Stock or such rights or warrants (making any Conversion Price reduction required by this Section 17.3(c)) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (making any further Conversion Price reduction required by Section 17.3(a) or 17.3 (b)), except (A) the Reference Date of such dividend or distribution as defined in this Section 17.3(c) shall be substituted as (a) "the record date in the case of a dividend or other distribution," and (b) "the record date for the determination of stockholders entitled to receive such rights or warrants" and (c) "the date fixed for such determination" within the meaning of Sections 17.3(a) and 17.3(b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed outstanding for purposes of computing any adjustment of the Conversion Price in Section 17.3(a). (d) In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in cash (excluding all regular cash dividends, if the annualized amount thereof per share of Common Stock does not exceed 15% of the Current Market Price per share of the Common Stock on the Trading Day immediately preceding the date of declaration of such dividend), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this Section 17.3(d) by a fraction of which the numerator shall be the Current Market Price per share of the Common Stock on the date fixed for the payment of such distribution less the amount of cash so distributed and not excluded as provided applicable to one share of Common Stock and the denominator shall be such Current Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution; provided, however, that in the event the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price per share of the Common Stock on the record date mentioned above, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Securities shall have the right to receive upon conversion the amount of cash such holder would have received had such holder converted each Security immediately prior to the record date for the distribution of the cash. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such record date had not been fixed. (e) In case a tender or exchange offer (other than an odd-lot offer) made by the Company or any subsidiary of the Company for all or any portion of the Common Stock shall expire and such tender or exchange offer shall involve the payment by the Company or such subsidiary of consideration per share of Common Stock having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall 56 have been amended) that exceeds ___% of the Current Market Price per share of Common Stock on the Trading Day next succeeding the Expiration Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this Section 17.3(e) by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time multiplied by the Current Market Price per share of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price per share of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (f) For the purpose of any computation under Sections 17.3(b), (c), (d) or (e), the "Current Market Price" per share of Common Stock on any date in question shall be deemed to be the average of the daily Closing Prices for the five consecutive Trading Days selected by the Company commencing not more than 20 Trading Days before, and ending not later than, the earlier of the day in question or, if applicable, the day before the "ex" date with respect to the issuance or distribution requiring such computation; provided, however, that if another event occurs that would require an adjustment pursuant to Sections 17.3(a) through (e), inclusive, the Board of Directors may make such adjustments to the Closing Prices during such five Trading Day period as it deems appropriate to effectuate the intent of the adjustments in this Section 17.3, in which case any such determination by the Board of Directors shall be set forth in a resolution of the Board of Directors and shall be conclusive. For purposes of this paragraph, the term "ex" date, (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the Nasdaq National Market or on such successor securities exchange as the Common Stock may be listed or in the relevant market from which the Closing Prices were obtained without the right to receive such issuance or distribution, and (ii) when used with respect to any tender or exchange offer, means the first date on which the Common Stock trades regular way on such securities exchange or in such market after the Expiration Time of such offer. (g) The Company may make such reductions in the Conversion Price, in addition to those required by Sections (a) through (e), as it considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. The Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least 20 days, the reduction is irrevocable during the period, and the Board of Directors of the Company shall have made a determination that such reduction would be in the best interest of the Company, which determination shall be conclusive. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to holders of record of the Securities a notice of the reduction at least 15 days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period it will be in effect. (h) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Price; provided, however, that any adjustments which by reason of this Section 17.3(h) are not required to be made shall be carried forward and taken into account in determining whether any subsequent adjustment shall be required. 57 (i) If any action would require adjustment of the Conversion Price pursuant to more than one of the provisions described above, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value to the holder of the Securities. SECTION 17.4. Reclassification, Consolidation, Merger or Sale of Assets. ----------------------------------------------------------- In the event that the Company shall be a party to any transaction, including without limitation (a) any recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (b) any consolidation of the Company with, or merger of the Company into any other Person, any merger of another Person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), (c) any sale, transfer or lease of all or substantially all of the assets of the Company or (d) any compulsory share exchange, in each case pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, then lawful provision shall be made as part of the terms of such transaction whereby the holder of each Security then outstanding shall have the right thereafter to convert each Security only into the kind and amount of securities, cash or other property receivable upon consummation of such transaction by a holder of the number of shares of Common Stock of the Company into which such Security could have been converted immediately prior to such transaction. The Company or the Person formed by such consolidation or resulting from such merger or which acquired such assets or which acquires the Company's shares, as the case may be, shall make provision in its certificate or articles of incorporation or other constituent document to establish such right. Such certificate or articles of incorporation or other constituent document shall provide for adjustments which, for events subsequent to the effective date of such certificate or articles of incorporation or other constitution document, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article XVII. The above provisions shall similarly apply to successive transactions of the foregoing type. SECTION 17.5. Notice of Adjustments of Conversion Price. ----------------------------------------- Whenever the Conversion Price is adjusted as herein provided: (a) The Company shall compute the adjusted Conversion Price and shall prepare a certificate signed by the Chief Financial Officer or the Treasurer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the Trustee, the Conversion Agent and the transfer agent for the Capital Securities and the Securities; and (b) notice stating the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall as soon as practicable be mailed by the Company to all record holders of Capital Securities and the Securities at their last addresses as they appear upon the stock transfer books of the Company and the Trust. SECTION 17.6. Prior Notice of Certain Events. ------------------------------ In case: (a) the Company shall (i) declare any dividend (or any other distribution) on its Common Stock, other than (A) a dividend payable in shares of Common Stock or (B) a dividend payable in cash that would 58 not require an adjustment pursuant to Section 17.3(c) or (d), or (ii) authorize a tender or exchange offer that would require an adjustment pursuant to Section 17.3(e); (b) the Company shall authorize the granting to all holders of Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or series or of any other rights or warrants; (c) of any reclassification of Common Stock (other than a subdivision or combination of the outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company shall be required, or the sale or transfer of all or substantially all of the assets of the Company or of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall (1) if any Capital Securities are outstanding, cause to be filed with the transfer agent for the Capital Securities, and shall cause to be mailed to the holders of record of the Capital Securities, at their last addresses as they shall appear upon the stock transfer books of the LFC Trust or (2) shall cause to be mailed to all Securityholders at their last addresses as they shall appear in the Security Register, at least 15 days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record (if any) is to be taken for the purpose of such dividend, distribution, rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up (but no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the corporate action required to be specified in such notice). Section 17.7. Certain Defined Terms. --------------------- The following definitions shall apply to terms used in this Article VII: (a) "Closing Prices" of any Security shall on any day shall mean the last reported sale price for such security, regular way, or such day or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, of such Security, in either case as reported on the NYSE Composite Tape or, if the Security is not listed or admitted to trading on the NYSE, on the principal national securities exchange on which such Security is listed or admitted to trading, or, if not listed or admitted to trading on a national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. or, if such Security is not quoted or admitted to trading on such quotation system, on the principal quotation system on which such Security is listed or admitted to trading or quoted, or, if not listed or admitted to trading or quoted on any national securities exchange or quotation system, the average of the closing bid and asked prices of such Security in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or, if not so available in such manner, as furnished by any NYSE member firm selected from time to time by the Board of Directors for that purpose or, if not so available in such manner, as otherwise determined in good faith by the Board of Directors. 59 (b) "Trading Day" shall mean a day on which securities are traded on the national securities exchange or quotation system used to determine the Closing Price. Section 17.8. Benefit Plans. ------------- Notwithstanding the foregoing provisions, the issuance of any shares of Common Stock pursuant to any plan providing for the issuance of any shares of Common Stock or options or rights to purchase such shares pursuant to any employee benefit plan or program of the Company pursuant to any option, warrant, right or exercisable, exchangeable or convertible security outstanding as of the date the Securities were first issued, shall not be deemed to constitute an issuance of Common Stock or exercisable, exchangeable or convertible securities by the Company to which any of the adjustment provisions described above applies. There shall also be no adjustment of the Conversion Price in case of the issuance of any stock (or securities convertible into or exchangeable for stock) of the Company except as specifically described in this Article XVII. Section 17.9. Certain Additional Rights. ------------------------- In case the Company shall, by dividend or otherwise, declare or make a distribution on its Common Stock referred to in Section 17.3(c) or (d) (including, without limitation, dividends or distributions referred to in the last sentence of Section 17.3(c)), the holder of the Securities, upon the conversion thereof subsequent to 5:00 p.m. (Eastern time) on the date fixed for the determination of stockholders entitled to receive such distribution and prior to the effectiveness of the Conversion Price adjustment in respect of such distribution, shall also be entitled to receive for each share of Common stock into which the Securities are converted, the portion of the shares of Common Stock, rights, warrants, evidences of indebtedness, shares of capital stock, cash and assets so distributed applicable to one share of Common Stock; provided, however, that, at the election of the Company (whose election shall be evidenced by a resolution of the Board of Directors) with respect to all Securityholders so converting, the Company may, in lieu of distributing to such holder any portion of such distribution not consisting of cash or securities of the Company, pay such holder an amount in cash equal to the fair market value thereof (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors). If any conversion of Securities described in the immediately preceding sentence occurs prior to the payment date for a distribution to holders of Common Stock which the holder of Securities so converted is entitled to receive in accordance with the immediately preceding sentence, the Company may elect (such election to be evidenced by a resolution of the Board of Directors) to distribute to such holder a due bill for the shares of Common Stock, rights, warrants, evidences of indebtedness, shares of capital stock, cash or assets to which such holder is so entitled, provided, that such due bill (i) meets any applicable requirements of the principal national securities exchange or other market on which the Common Stock is then traded and (ii) requires payment or delivery of such shares of Common Stock, rights, warrants, evidences of indebtedness, shares of capital stock, cash or assets no later than the date of payment or delivery thereof to holders of shares of Common Stock receiving such distribution. Section 17.10. Trustee Not Responsible for Determining Conversion Price or ----------------------------------------------------------- Adjustments. ----------- Neither the Trustee nor any Conversion Agent shall at any time be under any duty or responsibility to any holder or any Security to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. Neither the Trustee nor any Conversion Agent shall be accountable with respect to the validity or value (or the kind of account) of any shares of Common Stock or of any securities or property, which may 60 at any time be issued or delivered upon the conversion of any Security; and neither the Trustee nor any Conversion Agent makes any representation with respect thereto. Neither the Trustee nor any Conversion Agent shall be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property upon the surrender of any Security for the purpose of conversion, or, except as expressly herein provided, to comply with any of the covenants of the Company contained in Article III or Article XVII. Section 17.11. Expiration of Conversion Rights. ------------------------------- (a) Right of Company to Terminate Conversion Rights. On and after ___________________, the Company may, at its option, cause the conversion rights of holders of Securities to terminate if (i) the Company is then current in the payment of interest on the Securities (including Compounded Interest and Additional Interest, if any) (except to the extent that the payment of interest may have been deferred as a result of any Extension Period) and (ii) for at least 20 Trading Days within any period of 30 consecutive Trading Days, including the last Trading Day of such period, the Closing Price of the Common Stock shall have exceeded ___% of the Conversion Price of the Securities then in effect. (b) Exercise of Option Prior to a Dissolution Event Distribution. To exercise its conversion expiration option prior to the distribution of Securities from LFC Trust to the holders of Capital Securities upon the occurrence of a Dissolution Event (a "Dissolution Event Distribution"), the Company shall give written notice to LFC Trust directing LFC Trust to issue the Press Release (as defined in Section 5(h) of Annex I of the Declaration), to cause the conversion rights of the holders of Capital Securities to expire. The Company shall also furnish a copy of such notice to the Trustee (and the Conversion Agent if the Trustee is not then serving as the Conversion Agent). If LFC Trust fails to issue the Press Release within two (2) Business Days after its receipt of such notice, the Company may, on behalf of LFC Trust, issue the Press Release in accordance with the provisions of Section 5(h) of Annex I of the Declaration. The conversion rights of the holders of the Securities shall terminate simultaneously with the termination of the conversion rights of the holders of the Capital Securities. (c) Exercise of Option After a Dissolution Event Distribution. To exercise its conversion expiration option after a Dissolution Event Distribution, the Company shall issue a press release for publication on the Dow Jones News Service or on a comparable news service announcing the Conversion Termination Date of the Securities. Such press release must be issued prior to the opening of business on the second Trading Day after a period in which the conditions of Section 17.11(a) have been met, but in no event prior to ___________________. Such press release shall state that the Company has elected to exercise its right to terminate the conversion privilege, specify the Conversion Termination Date of the Securities (as determined in the manner set forth below) and provide the Conversion Price and the Closing Price of Common Stock, in each case as of the close of business on the Trading Day next preceding the date of the press release. Additionally, the Company shall cause a notice of the expiration of conversion rights (a "Notice of Conversion Termination") to be given by first- class mail to the holder of Securities, the Trustee (and the Conversion Agent if the Trustee is not then serving as the Conversion Agent) not more than four Business Days after the Company issues the press release. The Notice of Conversion Termination shall state, as appropriate: (i) the Conversion Termination Date of the Securities; (ii) the Conversion Price of the Securities and the Closing Price of the Common Stock, in each case as of the close of business on the Trading Day next preceding the date of the Notice of Conversion Termination; (iii) the place or places at which a conversion notice with respect to Securities may be given to the Conversion Agent in accordance with Section 17.2 prior to the Conversion Termination Date of the Securities; and (iv) such other information or instructions as the Company deems necessary or advisable to enable Securityholder to exercise its conversion right hereunder. Notice of Conversion Termination shall be deemed to have been given on the day such notice is first mailed by first-class mail, postage prepaid, to each holder of Securities at the address of the 61 holder appearing in the Security Register (whether or not the Securityholder receives the Notice of Conversion Termination). No defect in the Notice of Conversion Termination or in the mailing thereof with respect to any Securities shall affect the validity of the Company's exercise of its conversion expiration option if the press release referred to above shall have been issued. (d) Certain Definitions. The term "Conversion Termination Date" has the meaning assigned to such term in Section 5(h) of Annex I of the Declaration. The "Conversion Termination Date of the Securities" shall be the close of business on the Business Day selected by the Company which is not less than 30 nor more than 60 calendar days after (1) the date on which LFC Trust issues the Press Release announcing LFC Trust's intention to terminate the conversion rights of the holders of the Capital Securities or (2) the date the Company issues the press release required by Section 17.11(c) announcing its intention to terminate the conversion rights of the holders of the Securities, as the case may be. If the Company does not exercise its conversion expiration option, the Conversion Termination Date of the Securities (i) with respect to any principal amount of Securities which is called for repayment shall be the close of business on the Business Day prior to the scheduled date for such repayment and (ii) in any other case shall be the close of business on the Business Day prior to the Maturity Date of the Securities. As of the close of business on the earlier of the Conversion Termination Date or the Conversion Termination Date of the Securities, the Securities shall be deemed to be non-convertible securities. State Street Bank and Trust Company hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. LIFE FINANCIAL CORPORATION By ____________________________________ Daniel L. Perl President and Chief Executive Officer STATE STREET BANK AND TRUST COMPANY as Trustee By ____________________________________ ____________________________________ ____________________________________ Authorized Signatory 62 EXHIBIT A (FORM OF FACE OF SECURITY) [IF THE SECURITY IS A GLOBAL SECURITY, INSERT: -- THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC") TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] 63 $___________ No. CUSIP No. ______________ LIFE FINANCIAL CORPORATION ____% JUNIOR CONVERTIBLE SUBORDINATED DEBENTURE DUE ___________, ____ LIFE Financial Corporation, a Delaware corporation (the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _________ or registered assigns, the principal sum of _____________ Dollars on ____________, 2027 (the "Maturity Date"), unless previously prepaid, and to pay interest on the outstanding principal amount hereof from _______________, 1997, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 15, June 15, September 15 and December 15 of each year, commencing March 15, 1998 at the rate of ____% per annum until the principal hereof shall have become due and payable, and at the same rate per annum on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum compounded quarterly. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months and, for any period less than a full calendar month, the number of days elapsed in such 30- day month. In the event that any date on which the principal of (or premium, if any) or interest on this Security is payable is not a Business Day, then the payment payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that if such next succeeding Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Security (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, which shall be the first day of the month in which the relevant Interest Payment Date falls. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the holders on such regular record date and may be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the holders of Securities not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The principal of (and premium, if any) and interest on this Security shall be payable at the office or agency of the Trustee maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that, payment of interest may be made at the option of the Company by (i) check mailed to the holder entitled thereto at such address as shall appear in the Security Register or (ii) by wire transfer to an account maintained by the Person entitled thereto, provided that proper written wire transfer instructions have been received by the paying agent by the relevant record date. Notwithstanding the foregoing, so long as the holder of this Security is the Property Trustee, the payment of the principal of (and premium, if any) and interest on this Security will be made at such place and to such account as may be designated by the Property Trustee. 64 The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Allocable Amounts in respect of Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Security shall not be entitled to any benefit under the Indenture hereinafter referred to, or be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Security are continued on the reverse side hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place. 65 IN WITNESS WHEREOF, the Company has caused this instrument to be executed. LIFE FINANCIAL CORPORATION By: _______________________ Name: Title By: _______________________ Name: Title: CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within-mentioned Indenture. Dated ______________ State Street Bank and Trust Company, as Trustee By ____________________ Authorized Signatory 66 (FORM OF REVERSE OF SECURITY) This Security is one of the Junior Convertible Subordinated Debentures of the Company (herein sometimes referred to as the "Securities"), specified in the Indenture, all issued or to be issued under and pursuant to an Indenture, dated as of _______________, 1997 (the "Indenture"), duly executed and delivered between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"), to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Securities. Upon the occurrence and continuation of a Special Event, the Company shall have the right at any time, within 90 days following the occurrence of a Special Event, at any time prior to or after ___________________ (the "Initial Optional Prepayment Date"), to prepay this Security in whole, but not in part, at the Special Event Prepayment Price. "Special Event Prepayment Price" shall mean, with respect to any prepayment of the Securities following a Special Event, an amount in cash equal to 100% of the principal amount to be prepaid plus any accrued and unpaid interest thereon, including Compounded Interest and Additional Interest, if any, to the date of such prepayment. In addition, the Company shall have the right to prepay this Security, in whole or in part, at any time on or after the Initial Optional Prepayment Date (an "Optional Prepayment"), at an optional prepayment price (the "Optional Prepayment Price") equal to 100% of the principal amount to be prepaid, plus accrued and unpaid interest thereon (including Additional Interest and Compounded Interest, if any) to the applicable date of prepayment. The Optional Prepayment Price or the Special Event Prepayment Price, as the case requires, shall be paid prior to 12:00 noon, New York time, on the date of such prepayment or at such earlier time as the Company determines, provided, that the Company shall deposit with the Trustee an amount sufficient to pay the applicable Prepayment Price by 10:00 a.m., New York time, on the date such Prepayment Price is to be paid. Any prepayment pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days notice. If the Securities are only partially prepaid by the Company pursuant to an Optional Prepayment, the Securities will be prepaid by lot or by any other method utilized by the Trustee; provided that if, at the time of prepayment, the Securities are registered as a Global Security, the Depositary shall determine in accordance with its procedures the principal amount of such Securities held for the account of its participants to be prepaid. In the event of prepayment of this Security in part only, a new Security or Securities for the portion hereof not prepaid will be issued in the name of the holder hereof upon the cancellation hereof. Notwithstanding the foregoing, any prepayment of Securities by the Company shall be subject to the receipt by the Company of any required regulatory approval. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Securities may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of a majority in aggregate principal amount of the Securities at the time outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such supplemental indenture shall, without the consent of each holder of Securities then outstanding and affected thereby, (i) extend the Maturity Date of any Securities, or reduce the principal amount thereof, or reduce any amount payable on prepayment thereof, or reduce the rate or extend the time of payment of interest thereon (subject to Article XVI of the Indenture), or make the principal of, or interest or premium on, the Securities payable in any coin or currency other than U.S. dollars, or impair or affect the right of any holder of Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Securities, the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Securities at the time outstanding, on behalf of all of the holders of the Securities, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Securities or a default in respect of any covenant or provision which under the Indenture cannot be modified or amended without the consent of each holder of Securities then outstanding. Any such consent or waiver by the holder of this Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Security and of any Security issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Security at the time and place and at the rate and in the money herein prescribed or to convert the Securities as provided in the Indenture. The Company shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest by extending the interest payment period of such Securities for a period not exceeding 20 consecutive quarters, including the first such quarter during such extension period, and not to extend beyond the Maturity Date of the Securities (an "Extension Period"), at the end of which period the Company shall pay all interest then accrued and unpaid (together with interest thereon at the rate specified for the Securities to the extent that payment of such interest is enforceable under applicable law). Before the termination of any such Extension Period, the Company may further defer payments of interest by further extending such Extension Period, provided that such Extension Period, together with all such previous and further extensions within such Extension Period, shall not exceed 20 consecutive quarters, including the first quarter during such Extension Period, and shall not end on any date other than an Interest Payment Date or extend beyond the Maturity Date of the Securities. Upon the termination of any such Extension Period and the payment of all accrued and unpaid interest and any additional amounts then due, the Company may commence a new Extension Period, subject to the foregoing requirements. The Company has agreed that it will not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock (which includes common and preferred stock) or (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Company that rank pari passu with or junior in right of payment to the Securities or (iii) make any guarantee payments with respect to any guarantee by the Company of any securities or any Subsidiary of the Company (including Other Guarantees) if such guarantee ranks pari passu or junior in right of payment to the Securities (other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock of the Company; (b) any declaration of a dividend in connection with the implementation of a stockholder's rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto; (c) payments under the Capital Securities Guarantee; (d) as a direct result of, and only to the extent required in order to avoid the issuance of fractional shares of capital stock following a reclassification of the Company's capital stock or the exchange or the conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock; (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the exchange or conversion of such capital stock or the security being exchanged or converted and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees) if at such time (i) an Event of Default shall have occurred and be continuing (other than solely an Event of Default under Section 5.1(c) of the Indenture), (ii) there shall have occurred any event of which the Company has actual knowledge that (a) is, or with the giving of notice or the lapse of time, or both, would be, an Event of Default (other than solely an Event of Default under Section 5.1(c) of the Indenture) and (b) in respect of which the Company shall not have taken reasonable steps to cure, (iii) if such Securities are held by LFC Trust, the Company shall be in default with respect to its payment obligations under the Capital Securities Guarantee or (iv) the Company shall have given notice of its election of the exercise of its right to extend the interest payment period and any such extension shall be continuing. On the terms and subject to the conditions set forth in the Indenture, the holder of any security has the right, exercisable at any time on or before 5:00 p.m. (Eastern time) on the earlier of (i) the Business Day immediately preceding the date of repayment of such Security, whether at maturity or upon prepayment, and (ii) the Conversion Termination Date of the Securities, if any, to convert the principal amount thereof (or any portion thereof that is an integral multiple of $__) into fully paid and nonassessable shares of Common Stock of the Company at the Conversion Price prescribed in the Indenture. The number of shares issuable upon conversion of a Security is determined by dividing the principal amount of the Security converted by the Conversion Price in effect on the date of conversion. No fractional shares will be issued upon conversion but a cash adjustment will be made for any fractional interest. The outstanding principal amount of any Security shall be reduced by the portion of the principal amount thereof converted into shares of Common Stock. The conversion right and the Conversion Price are subject to adjustment as provided in the Indenture, to which reference is hereby made. Under certain circumstances specified in the Indenture, Securityholders converting Securities may be entitled to accrued and unpaid interest (including Compounded Interest and Additional Interest, if any, to the extent permitted by applicable law) on such Securities. The conversion rights of the holders of Securities are subject to termination at the option of the Company on and after ___________________, subject to and upon the satisfaction of certain conditions set forth in the Indenture. The Securities are issuable only in registered form without coupons. As provided in the Indenture and subject to the transfer restrictions limitations as may be contained herein and therein from time to time, this Security is transferable by the holder hereof on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Company in ________________ accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Security registrar duly executed by the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Security, the Company, the Trustee, any authenticating agent, any paying agent, any transfer agent and the registrar may deem and treat the holder hereof as the owner hereof (whether or not this Security shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Security registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and (subject to the Indenture) interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any authenticating agent nor any paying agent nor any transfer agent nor any registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or premium, if any, or interest on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. All capitalized terms used in this Security that are defined in the Indenture but not defined herein shall have the meanings assigned to them in the Indenture. THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ___________ WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfer this Security certificate to: ________________________________________________________________________________ ________________________________________________________________________________ (Insert assignees social security or tax identification number) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (INSERT ADDRESS AND ZIP CODE OF ASSIGNEE) and irrevocably appoints ________________________________________________________________________________ ________________________________________________________________________________ __________________________ agent to transfer this Security certificate on the books of the Company. The agent may substitute another to act for him or her. Date: __________________ Signature: ______________________________ (SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THIS SECURITY) Signature Guarantee(1): ___________________________________ _____________________ 1 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. CONVERSION REQUEST To: LIFE Financial Corporation The undersigned owner of these Securities hereby irrevocably exercises the option to convert these Securities, or the portion below designated, into Common Stock of LIFE Financial Corporation (the "Common Stock") in accordance with the terms of the Indenture (the "Indenture"), dated as of __________ __, 1997, between the Company and State Street Bank and Trust Company, as Trustee. Pursuant to the aforementioned exercise of the options to convert these Capital Securities, the undersigned hereby directs the Conversion Agent (as that term is defined in the Indenture) to convert such Securities on behalf of the undersigned, into Common Stock (at the conversion price specified in the Indenture). The undersigned also hereby directs the Conversion Agent that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares, be issued in the name of and delivered to the undersigned, unless a different name has been indicated in the assignment below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Date: _______________________ Principal Amount of Securities to be converted ($__ or integral multiples thereof): If a name or names other than the undersigned, please indicate in the spaces below the name or names in which the shares of Common Stock are to be issued, along with the address or addresses of such person or persons. ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THIS SECURITY) (FOR CONVERSION ONLY) Please Print or Type Name and Address, Including Zip Code, and Social Security or Other Identifying Number ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Signature Guarantee:* _____________________________ ______________ * Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. EX-4.5 6 FORM OF CAPITAL SECURITIES GUARANTEE AGREEMENT EXHIBIT 4.5 ==================================== CAPITAL SECURITIES GUARANTEE AGREEMENT LIFE FINANCIAL CORPORATION DATED AS OF ____________, 1997 ==================================== TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS AND INTERPRETATION........................ 1 SECTION 1.1 Definitions and Interpretation........................ 2 ARTICLE II TRUST INDENTURE ACT................................... 5 SECTION 2.1. Trust Indenture Act; Application...................... 5 SECTION 2.2. Lists of Holders of Securities........................ 5 SECTION 2.3. Reports by the Capital Securities Guarantee Trustee... 5 SECTION 2.4. Periodic Reports to Capital Securities Guarantee...... 6 Trustee SECTION 2.5. Evidence of Compliance with Condition Precedent....... 6 SECTION 2.6. Events of Default; Waiver............................. 6 SECTION 2.7. Events of Default; Notice............................. 6 SECTION 2.8. Conflicting Interests................................. 7 ARTICLE III POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE..................................... 7 SECTION 3.1. Powers and Duties of the Capital Securities Guarantee Trustee.............................................. 7 SECTION 3.2. Certain Rights of Capital Securities Guarantee Trustee.............................................. 9 SECTION 3.3. Not Responsible for Recitals or Issuance of Capital Securities Guarantee.................................. 11 ARTICLE IV CAPITAL SECURITIES GUARANTEE TRUSTEE.................. 11 SECTION 4.1. Capital Securities Guarantee Trustee; Eligibility..... 11 SECTION 4.2. Appointment, Removal and Resignation of Capital Securities Guarantee Trustee.......................... 12 ARTICLE V GUARANTEE............................................. 13 SECTION 5.1. Guarantee............................................. 13 SECTION 5.2. Waiver of Notice and Demand........................... 13 SECTION 5.3. Obligations Not Affected.............................. 13 SECTION 5.4. Rights of Holders..................................... 14 SECTION 5.5. Guarantee of Payment.................................. 15 SECTION 5.6 Subrogation........................................... 15 SECTION 5.7. Independent Obligations............................... 15
i ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION............ 15 SECTION 6.1. Limitation of Transactions........................... 15 SECTION 6.2. Ranking.............................................. 16 ARTICLE VII TERMINATION.......................................... 17 ARTICLE VIII COMPENSATION AND EXPENSES OF CAPITAL SECURITIES GUARANTEE TRUSTEE.................................... 17 ARTICLE IX INDEMNIFICATION...................................... 17 SECTION 9.1. Exculpation.......................................... 17 SECTION 9.2. Indemnification...................................... 18 ARTICLE X MISCELLANEOUS........................................ 18 SECTION 10.1. Successors and Assigns............................... 18 SECTION 10.2. Amendments........................................... 18 SECTION 10.3. Notices.............................................. 19 SECTION 10.4. Benefit.............................................. 20 SECTION 10.5. Governing Law........................................ 20
ii CAPITAL SECURITIES GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (the "Capital Securities Guarantee"), dated as of ____________, 1997, is executed and delivered by LIFE Financial Corporation, a Delaware corporation (the "Guarantor"), LIFE Financial Capital Trust, a Delaware statutory business trust (the "Issuer") and State Street Bank and Trust Company, a Massachusetts trust company, as trustee (the "Capital Securities Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Capital Securities (as defined herein) of the Issuer. WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"; and capitalized terms used herein not otherwise defined shall have the meanings ascribed thereto in the Declaration), dated as of ____________, 1997, among the trustees of the Issuer, the Guarantor, as sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing ____________ capital securities, having an aggregate liquidation amount of $____________, such capital securities being designated the ____% Convertible Trust Preferred Securities (collectively the "Capital Securities"). WHEREAS, as incentive for the Holders to purchase the Capital Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Capital Securities Guarantee, to pay to the Holders the Guarantee Payments (as defined herein). The Guarantor agrees to make certain other payments on the terms and conditions set forth herein. WHEREAS, the Guarantor is executing and delivering a guarantee agreement (the "Common Securities Guarantee"), with substantially identical terms to this Capital Securities Guarantee, for the benefit of the holders of the Common Securities (as defined herein), except that if an Event of Default has occurred and is continuing, the rights of holders of the Common Securities to receive Guarantee Payments under the Common Securities Guarantee are subordinated, to the extent and in the manner set forth in the Common Securities Guarantee, to the rights of holders of Capital Securities to receive Guarantee Payments under this Capital Securities Guarantee. NOW, THEREFORE, in consideration of the purchase by each Holder of the Capital Securities and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantor executes and delivers this Capital Securities Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. Definitions and Interpretation In this Capital Securities Guarantee, unless the context otherwise requires: 1 (a) Capitalized terms used in this Capital Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) all references to "the Capital Securities Guarantee" or "this Capital Securities Guarantee" are to this Capital Securities Guarantee as modified, supplemented or amended from time to time; (c) all references in this Capital Securities Guarantee to Articles and Sections are to Articles and Sections of this Capital Securities Guarantee, unless otherwise specified; (d) a term defined in the Trust Indenture Act has the same meaning when used in this Capital Securities Guarantee, unless otherwise defined in this Capital Securities Guarantee or unless the context otherwise requires; and (e) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act of 1933, as amended, or any successor rule thereunder. "Business Day" means any day other than a Saturday or a Sunday, or a day on which banking institutions in California or Massachusetts are authorized or required by law or executive order to close. "Capital Securities Guarantee Trustee" means State Street Bank and Trust Company, a Massachusetts trust company, until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Capital Securities Guarantee and thereafter means each such Successor Capital Securities Guarantee Trustee. "Common Securities" means the securities representing common undivided beneficial interests in the assets of the Issuer. "Corporate Trust Office" means the office of the Capital Securities Guarantee Trustee at which the corporate trust business of the Capital Securities Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at Two International Place, Boston, Massachusetts 02110. "Covered Person" means any Holder or beneficial owner of Capital Securities. "Debentures" means the series of subordinated debt securities of the Guarantor designated the ____% Junior Convertible Subordinated Debentures due __________, 2027 held by the Property Trustee of the Issuer. 2 "Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Capital Securities Guarantee. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Capital Securities, to the extent not paid or made by the Issuer: (i) any accumulated and unpaid Distributions that are required to be paid on such Capital Securities to the extent the Issuer has funds on hand legally available therefor at such time, (ii) the redemption price, including all accumulated and unpaid Distributions to the date of redemption (the "Redemption Price"), to the extent the Issuer has funds on hand legally available therefor at such time, with respect to any Capital Securities called for redemption by the Issuer, and (iii) upon a voluntary or involuntary termination and liquidation of the Issuer (other than in connection with the distribution of Debentures to the Holders in exchange for Capital Securities as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accumulated and unpaid Distributions on the Capital Securities to the date of payment, to the extent the Issuer has funds on hand legally available therefor, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer. If an Event of Default has occurred and is continuing, no Guarantee Payments under the Common Securities Guarantee with respect to the Common Securities or any guarantee payment under any Other Common Securities Guarantees shall be made until the Holders shall be paid in full the Guarantee Payments to which they are entitled under this Capital Securities Guarantee. "Holder" shall mean any holder, as registered on the books and records of the Issuer, of any Capital Securities; provided, however, that, in determining whether the holders of the requisite percentage of Capital Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Affiliate of the Guarantor. "Indemnified Person" means the Capital Securities Guarantee Trustee, any Affiliate of the Capital Securities Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Capital Securities Guarantee Trustee. "Indenture" means the Indenture dated as of ____________, 1997, between the Guarantor (the "Debenture Issuer") and State Street Bank and Trust Company, as trustee, pursuant to which the Debentures are to be issued to the Property Trustee of the Issuer. "Majority in liquidation amount of the Capital Securities" means, except as provided by the Trust Indenture Act, a vote by Holders of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all Capital Securities. 3 "Officer's Certificate" means, with respect to any Person, a certificate signed by the Chairman, the Co-Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President, the Comptroller, the Secretary or an Assistant Secretary of such Person. Any Officer's Certificate delivered with respect to compliance with a condition or covenant provided for in this Capital Securities Guarantee (other than pursuant to Section 314(a)(4) of the Trust Indenture Act) shall include: (a) a statement that the officer signing the Officer's Certificate has read the covenant or condition and the definitions relating thereto; (b) a statement that such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (c) a statement as to whether, in the opinion of such officer, such condition or covenant has been complied with. "Other Common Securities Guarantees" shall have the same meaning as "Other Guarantees" in the Common Securities Guarantee. "Other Debentures" means all junior subordinated debentures issued by the Guarantor from time to time and sold to trusts to be established by the Guarantor (if any), in each case similar to the Issuer. "Other Guarantees" means all guarantees to be issued by the Guarantor with respect to capital securities (if any) similar to the Capital Securities, issued by other trusts to be established by the Guarantor (if any), in each case similar to the Issuer. "Responsible Officer" means, with respect to the Capital Securities Guarantee Trustee, any officer within the Corporate Trust Office of the Capital Securities Guarantee Trustee, including any vice president, any assistant vice president, any assistant secretary, any assistant treasurer, any trust officer, any senior trust officer or other officer in the Corporate Trust Office of the Capital Securities Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Successor Capital Securities Guarantee Trustee" means a successor Capital Securities Guarantee Trustee possessing the qualifications to act as Capital Securities Guarantee Trustee under Section 4.1. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. 4 "Trust Securities" means the Common Securities and the Capital Securities, collectively. ARTICLE II TRUST INDENTURE ACT SECTION 2.1. Trust Indenture Act; Application -------------------------------- (a) This Capital Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Capital Securities Guarantee and, to the extent applicable, shall be governed by such provisions; and (b) if and to the extent that any provision of this Capital Securities Guarantee limits, qualifies or conflicts with the duties imposed by Section 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.2. Lists of Holders of Securities ------------------------------ (a) The Guarantor shall provide the Capital Securities Guarantee Trustee (unless the Capital Securities Guarantee Trustee is otherwise the registrar of the Capital Securities) with a list, in such form as the Capital Securities Guarantee Trustee may reasonably require, of the names and addresses of the Holders ("List of Holders") (i) within 14 days after each record date for payment of Distributions (which shall list the Holders as of such dates), and (ii) at any other time within 30 days of receipt by the Guarantor of a written request for a List of Holders by a Holder for a purpose reasonably related to such Holder's interest as a Holder as of a date no more than 14 days before such List of Holders is given to the Capital Securities Guarantee Trustee; provided, however, that the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Capital Securities Guarantee Trustee by the Guarantor and the Capital Securities Guarantee Trustee should be entitled to rely on such most recent List of Holders. The determination of what constitutes a purpose reasonably related to a Holder's interest as a Holder shall be in the sole discretion of the Administrators of the Issuer. The Capital Securities Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Capital Securities Guarantee Trustee shall comply with its obligations under Sections 311(a), 311(b) and Section 312(b) of the Trust Indenture Act. SECTION 2.3. Reports by the Capital Securities Guarantee Trustee --------------------------------------------------- Within 60 days after May 15 of each year, commencing May 15, 1998, the Capital Securities Guarantee Trustee shall provide to the Holders such reports as are required by Section 313(a) of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Capital Securities Guarantee Trustee shall also comply with the other requirements of Section 313 of the Trust Indenture Act. 5 SECTION 2.4. Periodic Reports to Capital Securities Guarantee Trustee -------------------------------------------------------- The Guarantor shall provide to the Capital Securities Guarantee Trustee such documents, reports and information as required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314(a)(4) of the Trust Indenture Act, such compliance certificate to be delivered on or before 120 days after the end of each fiscal year of the Guarantor; provided, that any such information, documents or reports required to be filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, shall be filed with the Capital Securities Guarantee Trustee within 15 days after the same is required to be filed with the Securities and Exchange Commission. Delivery of such reports, information and documents to the Capital Securities Guarantee Trustee is for informational purposes only and the Capital Securities Guarantee Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Guarantor's compliance with any of its covenants hereunder (as to which the Capital Securities Guarantee Trustee is entitled to rely exclusively on Officer's Certificates). SECTION 2.5. Evidence of Compliance with Conditions Precedent ------------------------------------------------ The Guarantor shall provide to the Capital Securities Guarantee Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Capital Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officer's Certificate. SECTION 2.6. Events of Default; Waiver ------------------------- The Holders of a Majority in liquidation amount of Capital Securities may, by vote, on behalf of all the Holders, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Capital Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.7. Events of Default; Notice ------------------------- (a) The Capital Securities Guarantee Trustee, within 90 days after the occurrence of a default with respect to this Capital Securities Guarantee, shall mail by first class postage prepaid, to all Holders, notices of all defaults actually known to a Responsible Officer of the Capital Securities Guarantee Trustee, unless such defaults have been cured before the giving of such notice; provided that, except in the case of default in the payment of any Guarantee Payment, the Capital Securities Guarantee Trustee shall be protected in withholding such notice if and so long as a 6 Responsible Officer of the Capital Securities Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders. (b) The Capital Securities Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Capital Securities Guarantee Trustee shall have received written notice from the Guarantor, or a Responsible Officer of the Capital Securities Guarantee Trustee charged with the administration of the Declaration shall have obtained actual knowledge, of such Event of Default. SECTION 2.8. Conflicting Interests --------------------- The Declaration shall be deemed to be specifically described in this Capital Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE III POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 3.1. Powers and Duties of the Capital Securities Guarantee Trustee ------------------------------------------------------------- (a) This Capital Securities Guarantee shall be held by the Capital Securities Guarantee Trustee for the benefit of the Holders, and the Capital Securities Guarantee Trustee shall not transfer this Capital Securities Guarantee to any Person except a Holder exercising such Holder's rights pursuant to Section 5.4(b) or to a Successor Capital Securities Guarantee Trustee on acceptance by such Successor Capital Securities Guarantee Trustee of its appointment to act as Successor Capital Securities Guarantee Trustee. The right, title and interest of the Capital Securities Guarantee Trustee shall automatically vest in any Successor Capital Securities Guarantee Trustee, and such vesting and succession of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Capital Securities Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Capital Securities Guarantee Trustee has occurred and is continuing, the Capital Securities Guarantee Trustee shall enforce this Capital Securities Guarantee for the benefit of the Holders. (c) The Capital Securities Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Capital Securities Guarantee, and no implied covenants shall be read into this Capital Securities Guarantee against the Capital Securities Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer of the Capital Securities Guarantee Trustee has actual knowledge, the Capital Securities Guarantee Trustee shall exercise such of the rights and 7 powers vested in it by this Capital Securities Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Capital Securities Guarantee shall be construed to relieve the Capital Securities Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (i) the duties and obligations of the Capital Securities Guarantee Trustee shall be determined solely by the express provisions of this Capital Securities Guarantee, and the Capital Securities Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Capital Securities Guarantee, and no implied covenants or obligations shall be read into this Capital Securities Guarantee against the Capital Securities Guarantee Trustee; and (ii) in the absence of bad faith on the part of the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Capital Securities Guarantee Trustee and conforming to the requirements of this Capital Securities Guarantee; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Capital Securities Guarantee; (2) the Capital Securities Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Capital Securities Guarantee Trustee, unless it shall be proved that the Capital Securities Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (3) the Capital Securities Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in liquidation amount of the Capital Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Capital 8 Securities Guarantee Trustee, or exercising any trust or power conferred upon the Capital Securities Guarantee Trustee under this Capital Securities Guarantee; and (4) no provision of this Capital Securities Guarantee shall require the Capital Securities Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Capital Securities Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Capital Securities Guarantee or indemnity, reasonably satisfactory to the Capital Securities Guarantee Trustee, against such risk or liability is not reasonably assured to it. SECTION 3.2. Certain Rights of Capital Securities Guarantee Trustee ------------------------------------------------------ (a) Subject to the provisions of Section 3.1: (i) The Capital Securities Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) Any direction or act of the Guarantor contemplated by this Capital Securities Guarantee may be sufficiently evidenced by an Officer's Certificate; (iii) Whenever, in the administration of this Capital Securities Guarantee, the Capital Securities Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Capital Securities Guarantee Trustee (unless other evidence is herein specifically prescribed), in the absence of bad faith on its part, may request and conclusively rely upon an Officer's Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor; (iv) The Capital Securities Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any rerecording, refiling or registration thereof); (v) The Capital Securities Guarantee Trustee may consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. 9 Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Capital Securities Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Capital Securities Guarantee from any court of competent jurisdiction; (vi) The Capital Securities Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Capital Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Capital Securities Guarantee Trustee such security and indemnity, reasonably satisfactory to the Capital Securities Guarantee Trustee, against the costs, expenses (including reasonable attorneys' fees and expenses and the expenses of the Capital Securities Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Capital Securities Guarantee Trustee; provided that, nothing contained in this Section 3.2(a)(vi) shall be taken to relieve the Capital Securities Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Capital Securities Guarantee; (vii) The Capital Securities Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Capital Securities Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) The Capital Securities Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Capital Securities Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (ix) Any action taken by the Capital Securities Guarantee Trustee or its agents hereunder shall bind the Holders, and the signature of the Capital Securities Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Capital Securities Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Capital Securities Guarantee, both of which shall be conclusively evidenced by the Capital Securities Guarantee Trustee's or its agent's taking such action; 10 (x) Whenever in the administration of this Capital Securities Guarantee the Capital Securities Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Capital Securities Guarantee Trustee (i) may request instructions from the Holders of a Majority in liquidation amount of the Capital Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions; and (xi) The Capital Securities Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Capital Securities Guarantee. (b) No provision of this Capital Securities Guarantee shall be deemed to impose any duty or obligation on the Capital Securities Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Capital Securities Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Capital Securities Guarantee Trustee shall be construed to be a duty. SECTION 3.3. Not Responsible for Recitals or Issuance of Capital --------------------------------------------------- Securities Guarantee - -------------------- The recitals contained in this Capital Securities Guarantee shall be taken as the statements of the Guarantor, and the Capital Securities Guarantee Trustee does not assume any responsibility for their correctness. The Capital Securities Guarantee Trustee makes no representation as to the validity or sufficiency of this Capital Securities Guarantee. ARTICLE IV CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 4.1. Capital Securities Guarantee Trustee; Eligibility ------------------------------------------------- (a) There shall at all times be a Capital Securities Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or Person permitted by the Securities and Exchange Commission to act as an institutional trustee under the Trust 11 Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least ___ million U.S. dollars ($__________), and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.1(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Capital Securities Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Capital Securities Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Capital Securities Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Capital Securities Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act, subject to the penultimate paragraph thereof. SECTION 4.2. Appointment, Removal and Resignation of Capital Securities ---------------------------------------------------------- Guarantee Trustee --------- ------- (a) Subject to Section 4.2(b), the Capital Securities Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default. (b) The Capital Securities Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Capital Securities Guarantee Trustee and delivered to the Guarantor. (c) The Capital Securities Guarantee Trustee shall hold office until a Successor Capital Securities Guarantee Trustee shall have been appointed or until its removal or resignation. The Capital Securities Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Capital Securities Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Capital Securities Guarantee Trustee and delivered to the Guarantor and the resigning Capital Securities Guarantee Trustee. (d) If no Successor Capital Securities Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery of an instrument of removal or resignation, the Capital Securities Guarantee Trustee resigning or being removed may 12 petition any court of competent jurisdiction for appointment of a Successor Capital Securities Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Capital Securities Guarantee Trustee. (e) No Capital Securities Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Capital Securities Guarantee Trustee. (f) Upon termination of this Capital Securities Guarantee or removal or resignation of the Capital Securities Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Capital Securities Guarantee Trustee all amounts due to the Capital Securities Guarantee Trustee accrued to the date of such termination, removal or resignation. ARTICLE V GUARANTEE SECTION 5.1. Guarantee --------- The Guarantor hereby irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.2. Waiver of Notice and Demand --------------------------- The Guarantor hereby waives notice of acceptance of this Capital Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3. Obligations Not Affected ------------------------ The obligations, covenants, agreements and duties of the Guarantor under this Capital Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Capital Securities to be performed or observed by the Issuer; 13 (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Capital Securities (as such terms are defined therein) or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Capital Securities (other than an extension of time for payment of Distributions, Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures permitted by the Indenture); (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Capital Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Capital Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) except as set forth in Article VII hereof, any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor with respect to the Guarantee Payments shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4. Rights of Holders ----------------- (a) The Holders of a Majority in liquidation amount of the Capital Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Capital Securities Guarantee Trustee in respect of this Capital Securities Guarantee or exercising any trust or power conferred upon the Capital Securities Guarantee Trustee under this Capital Securities Guarantee; provided, however, that, subject to Section 3.1, the Capital Securities Guarantee Trustee shall have the right to decline to follow any such direction if the Capital Securities Guarantee Trustee, upon advice of counsel, shall determine that the action so directed would be unjustly prejudicial to the Holders not taking part in such direction or if the Capital Securities Guarantee Trustee, upon advice of counsel, determines that the action or proceeding so directed may 14 not lawfully be taken or if the Capital Securities Guarantee Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Capital Securities Guarantee Trustee in personal liability. (b) If the Capital Securities Guarantee Trustee fails to enforce such Capital Securities Guarantee, any Holder may institute a legal proceeding directly against the Guarantor to enforce the Capital Securities Guarantee Trustee's rights under this Capital Securities Guarantee, without first instituting a legal proceeding against the Issuer, the Capital Securities Guarantee Trustee or any other Person. The Guarantor waives any right or remedy to require that any action be brought first against the Issuer or any other Person before proceeding directly against the Guarantor. SECTION 5.5. Guarantee of Payment -------------------- This Capital Securities Guarantee creates a guarantee of payment and not of collection. SECTION 5.6. Subrogation ----------- The Guarantor shall be subrogated to all rights of the Holders against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Capital Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Capital Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Capital Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7. Independent Obligations ----------------------- The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Capital Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Capital Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof. ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1. Limitation of Transactions -------------------------- If (i) an Event of Default (as defined in the Indenture) shall have occurred and be continuing (other than solely an Event of Default as described in Section 5.1(c) of the Indenture), (ii) there shall 15 have occurred any event of which the Guarantor has actual knowledge that (a) is, or with the giving of notice or the lapse of time, or both, would be an Event of Default (as defined in the Indenture), other than solely an Event of Default as described in Section 5.1(c) of the Indenture, and (b) in respect of which the Guarantor shall not have taken reasonable steps to cure, (iii) in the event the Debentures are held by the Property Trustee and the Guarantor shall be in default with respect to its payment of any obligations under this Capital Securities Guarantee or (iv) the Guarantor shall have given notice of its election of the exercise of its right to extend the interest payment period pursuant to Section 16.1 of the Indenture and any such extension shall be continuing, then, in each such case, so long as any Capital Securities remain outstanding, the Guarantor shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Guarantor's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or redeem any debt securities of the Guarantor (including any Other Debentures) that rank pari passu with or junior in right of payment to the Debentures or (iii) make any guarantee payments with respect to any guarantee by the Guarantor of any securities of any subsidiary of the Guarantor (including Other Guarantees) if such guarantee ranks pari passu or junior in right of payment to the Debentures, other than (a) dividends or distributions in shares of, or options, warrants, rights to subscribe for or purchase shares of, common stock of the Guarantor, (b) any declaration of a dividend in connection with the implementation of a stockholder's rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a direct result of, and only to the extent required in order to avoid the issuance of fractional shares of capital stock following, a reclassification of the Guarantor's capital stock or the exchange or the conversion of one class or series of the Guarantor's capital stock for another class or series of the Guarantor's capital stock, (e) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of common stock related to the issuance of common stock or rights under any of the Guarantor's benefit plans for its directors, officers or employees. SECTION 6.2. Ranking ------- This Capital Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to Senior Indebtedness (as defined in the Indenture), to the same extent and in the same manner that the Debentures are subordinated to Senior Indebtedness pursuant to the Indenture, it being understood that the terms of Article XV of the Indenture shall apply to the obligations of the Guarantor under this Capital Securities Guarantee as if (x) such Article XV were set forth herein in full and (y) such obligations were substituted for the term "Securities" appearing in such Article XV, (ii) pari passu with the Debentures, the Other Debentures and with the most senior preferred or preference stock now or hereafter issued by the Guarantor and with any Other Guarantee and any Other Common Securities Guarantee and any guarantee now or hereafter entered into by the Guarantor in respect of any preferred or preference stock of any Affiliate of the Guarantor, and (iii) senior to the Guarantor's common stock. 16 ARTICLE VII TERMINATION This Capital Securities Guarantee shall terminate (i) upon full payment of the Redemption Price of all of the Capital Securities, or (ii) upon liquidation of the Issuer and the full payment of the amounts payable in accordance with the Declaration or the distribution of the Debentures to the Holders of all of the Capital Securities. Notwithstanding the foregoing, this Capital Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder must restore payment of any sums paid under the Capital Securities or under this Capital Securities Guarantee. ARTICLE VIII COMPENSATION AND EXPENSES OF CAPITAL SECURITIES GUARANTEE TRUSTEE The Guarantor agrees: (a) to pay to the Capital Securities Guarantee Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision or law in regard to the compensation of a trustee of an express trust); and (b) except as otherwise expressly provided herein, to reimburse the Capital Securities Guarantee Trustee upon request for all reasonable expenses, disbursements and advances incurred or made by the Capital Securities Guarantee Trustee in accordance with any provision of this Capital Securities Guarantee (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to their respective negligence or bad faith. The provisions of this Article VIII shall survive the dissolution of the Issuer and the termination of this Capital Securities Guarantee and the removal or resignation of the Capital Securities Guarantee Trustee. The Capital Securities Guarantee Trustee may not claim any lien or charge on any property of the Issuer as a result of any amount due pursuant to this Article VIII. ARTICLE IX INDEMNIFICATION SECTION 9.1. Exculpation ----------- (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance 17 with this Capital Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Capital Securities Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders might properly be paid. SECTION 9.2. Indemnification --------------- The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, claim or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 9.2 shall survive the dissolution of the Issuer, the termination of this Capital Securities Guarantee and the removal or resignation of the Capital Securities Guarantee Trustee. ARTICLE X MISCELLANEOUS SECTION 10.1. Successors and Assigns ---------------------- All guarantees and agreements contained in this Capital Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders then outstanding. SECTION 10.2. Amendments ---------- Except with respect to any changes that do not materially adversely affect the rights of Holders (in which case no consent of Holders will be required), this Capital Securities Guarantee may only be amended with the prior approval of the Holders of a Majority in liquidation amount of the Capital Securities (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages 18 are determined). The provisions of the Declaration with respect to consents to amendments thereof (whether at a meeting or otherwise) shall apply to the giving of such approval. SECTION 10.3. Notices ------- All notices provided for in this Capital Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) If given to the Issuer, in care of the Administrator at the Issuer's mailing address set forth below (or such other address as the Issuer may give notice of to the Holders and the Capital Securities Guarantee Trustee): LIFE Financial Capital Trust c/o LIFE Financial Corporation 10540 North Magnolia Avenue, Unit B Riverside, California 92505 Attention: Chief Executive Officer (b) If given to the Capital Securities Guarantee Trustee, at the Capital Securities Guarantee Trustee's mailing address set forth below (or such other address as the Capital Securities Guarantee Trustee may give notice of to the Holders and the Issuer): State Street Bank and Trust Company Two International Place Boston, Massachusetts 02110 Attention: Corporate Trust Administration (c) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Capital Securities and the Capital Securities Guarantee Trustee): LIFE Financial Corporation 10540 North Magnolia Avenue, Unit B Riverside, California 92505 Attention: Chief Executive Officer (d) If given to any Holder of Capital Securities, at the address set forth on the books and records of the Issuer. 19 All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 10.4. Benefit ------- This Capital Securities Guarantee is solely for the benefit of the Holders and, subject to Section 3.1(a), is not separately transferable from the Capital Securities. SECTION 10.5. Governing Law ------------- THIS CAPITAL SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. 20 THIS CAPITAL SECURITIES GUARANTEE is executed as of the day and year first above written. LIFE Financial Corporation, as Guarantor By: ________________________ Daniel L. Perl President and Chief Executive Officer LIFE Financial Capital Trust By: ________________________ Daniel L. Perl Administrator State Street Bank and Trust Company, as Capital Securities Guarantee Trustee By: ________________________ ________________________ 21 EX-5.1 7 OPINION OF MULDOON, MURPHY & FAUCETTE EXHIBIT 5.1 _______________, 1997 LIFE Financial Corporation 10540 North Magnolia Avenue, Unit B Riverside, California 92505 Gentlemen: We have acted as counsel to LIFE Financial Corporation, a Delaware corporation (the "Company"), in connection with the preparation and filing of a Registration Statement on Form S-1 (Registration No. ___-_____) (the "Registration Statement"), under the Securities Act of 1933, as amended, with respect to $__________ aggregate principal amount of ____% Junior Convertible Subordinated Debentures due 2027 (the "Debentures") of the Company, $__________ aggregate liquidation amount of ____% Convertible Trust Preferred Securities (the "Capital Securities") of Life Financial Capital Trust, a business trust created under the laws of the State of Delaware (the "Trust"), shares of common stock, par value $0.01 per share, of the Company (the "Common Stock") issuable upon conversion of the Debentures and Capital Securities (the "Conversion Shares") and the guarantee with respect to the Capital Securities (the "Guarantee") to be executed and delivered by the Company for the benefit of the holders from time to time of the Capital Securities. In so acting, we have examined originals or copies, certified or otherwise identified to our satisfaction, of the Registration Statement, the Prospectus that is a part of the Registration Statement (the "Prospectus"), the form of Amended and Restated Declaration of Trust (the "Declaration") among the Company, as Sponsor, State Street Bank and Trust Company, as Property Trustee, Delaware Trust Capital Management, as Delaware Trustee, the administrators named therein and the holders from time to time of beneficial interests in the assets of the Trust, the form of Indenture (the "Indenture") between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"), the form of Debenture set forth in the Indenture, the form of Guarantee, and such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives of the Company as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. Life Financial Corporation ____________________, 1997 Page 2 In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. As to all questions of fact material to this opinion that have not been independently established, we have relied upon certificates or comparable documents of officers and representatives of the Company. We have also assumed (i) the due incorporation and valid existence of the Company, (ii) that the Company has the requisite corporate power and authority to enter into and perform its obligations under the Declaration, the Indenture, the Debentures and the Guarantee and (iii) the due authorization, execution and delivery of the Declaration, the Indenture, the Debentures and the Guarantee by the Company. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that when the Declaration, the Indenture and the Guarantee have been duly authorized, executed and delivered by the parties thereto: 1. The Debentures, when duly authenticated by the Trustee pursuant to the terms of the Indenture, and delivered and paid for in accordance with the terms of the Indenture and as contemplated by the Registration Statement, will be validly issued and will constitute the legally binding obligations of the Company, entitled to the benefits of the Indenture, in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 2. The Guarantee will constitute the legally binding obligation of the Company, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 3. When certificates representing the Conversion Shares have been manually signed by an authorized officer of the transfer agent and registrar for the Common Stock, registered by such transfer agent and registrar and delivered to the holders of Capital Securities upon conversion thereof in accordance with the terms of the Declaration and the Indenture, the Conversion Shares will be duly authorized and will be validly issued, fully paid and nonassessable. Life Financial Corporation ____________________, 1997 Page 3 The opinions herein are limited to the laws of the State of Delaware and the corporate laws of the State of Delaware, and we express no opinion as to the effect on the matters covered by this opinion of the laws of any other jurisdiction. The opinions expressed herein are rendered solely for your benefit in connection with the transactions described herein. Those opinions may not be used or relied upon by any other person, nor, except as provided below, may this letter or any copies hereof be furnished to a third party, filed with a governmental agency, quoted, cited or otherwise referred to without our prior written consent. We understand that you have received an opinion from Prickett, Jones, Elliott, Kristol & Schree, special Delaware counsel for the Company and the Trust. We are expressing no opinion with respect to the matters contained in such opinion. Very truly yours, EX-23.1 8 CONSENT OF GRANT THORNTON LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We have issued our report dated February 8, 1996, (except for the "Earnings per Share" paragraph of Note 1, as to which the date is June 30, 1997) accompanying the financial statements of LIFE Financial Corporation contained in the Registration Statement on Form S-1 and Prospectus included therein. We consent to the use of the aforementioned report in the Registration Statement on Form S-1 and Prospectus included therein, and to the use of our name as it appears under the caption "Experts". /s/ Grant Thornton LLP Grant Thornton LLP Irvine, California December 4, 1997 EX-23.2 9 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated January 31, 1995, except the "Basis of Presentation and Description of Business" and "Earnings per Share" paragraphs in Note 1, which are as of June 30, 1997, relating to the financial statements of LIFE Financial Corporation for the year ended December 31, 1994, which appears in such Prospectus. We also consent to the references to us under the heading "Experts" in such Prospectus. /s/ Price Waterhouse LLP Price Waterhouse LLP Los Angeles, California December 1, 1997 EX-23.3 10 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of LIFE Financial Corporation on Form S-1 of our report dated February 7, 1997 (March 14, 1997 as to Note 16) (which report expresses an unqualified opinion and includes an explanatory paragraph referring to the adoption of Statement of Financial Accounting Standards No. 122) on the financial statements of LIFE Financial Corporation as of and for the year ended December 31, 1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche llp Deloitte & Touche llp Costa Mesa, California December 2, 1997 EX-23.4 11 CONSENT OF MULDOON, MURPHY & FAUCETTE EXHIBIT 23.4 CONSENT We hereby consent to the references to this firm and our opinions in the Registration Statement on Form S-1 filed by LIFE Financial Corporation and LIFE Financial Capital Trust and all amendments thereto. MULDOON, MURPHY & FAUCETTE /s/ MULDOON, MURPHY & FAUCETTE Dated this 4th day of December, 1997 EX-25.1 12 T-1 STATE STREET BANK UNDER DECLARATION EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 __________ STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) __ STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) MASSACHUSETTS 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) John R. Towers, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) _____________________ LIFE FINANCIAL CAPITAL TRUST (Exact name of obligor as specified in its charter) DELAWARE XX-XXXXXXX (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10540 NORTH MAGNOLIA AVENUE RIVERSIDE, CALIFORNIA 92503 (Address of principal executive offices) (Zip Code) ____________________ % CONVERTIBLE TRUST PREFERRED SECURITIES (Title of indenture securities) GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22- 17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(B) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 3rd day of December, 1997. STATE STREET BANK AND TRUST COMPANY By: /S/ EARL W. DENNISON JR. ---------------------------------------- EARL W. DENNISON JR. VICE PRESIDENT 2 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by LIFE FINANCIALCAPITAL TRUST of its % CONVERTIBLE TRUST PREFERRED SECURITIES, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /S/ EARL W. DENNISON JR. ---------------------------------- EARL W. DENNISON JR. VICE PRESIDENT DATED: DECEMBER 3, 1997 3 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business September 30, 1997, ------------------ published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin............................ 1,380,475 Interest-bearing balances..................................................... 8,821,855 Securities......................................................................... 10,461,989 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary........................................... 6,085,138 Loans and lease financing receivables: Loans and leases, net of unearned income ..................................... 5,597,831 Allowance for loan and lease losses .......................................... 79,416 Allocated transfer risk reserve............................................... 0 Loans and leases, net of unearned income and allowances....................... 5,518,415 Assets held in trading accounts.................................................... 917,895 Premises and fixed assets.......................................................... 390,028 Other real estate owned............................................................ 779 Investments in unconsolidated subsidiaries......................................... 34,278 Customers' liability to this bank on acceptances outstanding....................... 83,470 Intangible assets.................................................................. 227,659 Other assets....................................................................... 1,969,514 ---------- Total assets....................................................................... 35,891,495 ========== LIABILITIES Deposits: In domestic offices........................................................... 8,095,559 Noninterest-bearing...................................................... 5,962,025 Interest-bearing......................................................... 2,133,534 In foreign offices and Edge subsidiary........................................ 14,399,173 Noninterest-bearing...................................................... 86,798 Interest-bearing......................................................... 14,312,375 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary........................................... 7,660,881 Demand notes issued to the U.S. Treasury and Trading Liabilities................... 1,107,552 Other borrowed money............................................................... 589,733 Subordinated notes and debentures.................................................. 0 Bank's liability on acceptances executed and outstanding........................... 85,600 Other liabilities.................................................................. 1,830,593 Total liabilities.................................................................. 33,769,091 ---------- EQUITY CAPITAL Perpetual preferred stock and related surplus...................................... 0 Common stock....................................................................... 29,931 Surplus............................................................................ 437,183 Undivided profits and capital reserves/Net unrealized holding gains (losses)....... 1,660,158 Cumulative foreign currency translation adjustments................................ (4,868) Total equity capital............................................................... 2,122,404 ---------- Total liabilities and equity capital............................................... 35,891,495
4 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 EX-25.2 13 T-1 STMNT OF ELIGIBILITIY UNDER THE INDENTURE EXHIBIT 25.2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 _________ STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) __ STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) John R. Towers, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) _____________________ LIFE FINANCIAL CORPORATION (Exact name of obligor as specified in its charter) DELAWARE 33-0743196 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10540 NORTH MAGNOLIA AVENUE, UNIT B RIVERSIDE, CALIFORNIA 92503 (Address of principal executive offices) (Zip Code) ____________________ % JUNIOR CONVERTIBLE SUBORDINATED DEBENTURES (Title of indenture securities) GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22- 17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T- 1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(B) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 3rd day of December, 1997. STATE STREET BANK AND TRUST COMPANY By: /S/ EARL W. DENNISON JR. -------------------- EARL W. DENNISON JR. VICE PRESIDENT 2 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by LIFE FINANCIAL CORPORATION of its % JUNIOR CONVERTIBLE SUBORDINATED DEBENTURES, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /S/ EARL W. DENNISON JR. -------------------- EARL W. DENNISON JR. VICE PRESIDENT DATED: DECEMBER 3, 1997 3 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business September 30, 1997, ------------------ published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin............................. 1,380,475 Interest-bearing balances...................................................... 8,821,855 Securities............................................................................... 10,461,989 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary............................................ 6,085,138 Loans and lease financing receivables: Loans and leases, net of unearned income ...................................... 5,597,831 Allowance for loan and lease losses ........................................... 79,416 Allocated transfer risk reserve................................................ 0 Loans and leases, net of unearned income and allowances........................ 5,518,415 Assets held in trading accounts.......................................................... 917,895 Premises and fixed assets................................................................ 390,028 Other real estate owned.................................................................. 779 Investments in unconsolidated subsidiaries............................................... 34,278 Customers' liability to this bank on acceptances outstanding............................. 83,470 Intangible assets........................................................................ 227,659 Other assets............................................................................. 1,969,514 ---------- Total assets............................................................................. 35,891,495 ========== LIABILITIES Deposits: In domestic offices............................................................ 8,095,559 Noninterest-bearing.................................................. 5,962,025 Interest-bearing..................................................... 2,133,534 In foreign offices and Edge subsidiary......................................... 14,399,173 Noninterest-bearing.................................................. 86,798 Interest-bearing..................................................... 14,312,375 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary............................................ 7,660,881 Demand notes issued to the U.S. Treasury and Trading Liabilities......................... 1,107,552 Other borrowed money..................................................................... 589,733 Subordinated notes and debentures........................................................ 0 Bank's liability on acceptances executed and outstanding................................. 85,600 Other liabilities........................................................................ 1,830,593 Total liabilities........................................................................ 33,769,091 ---------- EQUITY CAPITAL Perpetual preferred stock and related surplus............................................ 0 Common stock............................................................................. 29,931 Surplus.................................................................................. 437,183 Undivided profits and capital reserves/Net unrealized holding gains (losses)............. 1,660,158 Cumulative foreign currency translation adjustments...................................... (4,868) Total equity capital..................................................................... 2,122,404 ---------- Total liabilities and equity capital..................................................... 35,891,495
4 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 EX-25.3 14 T-1 STATEMENT OF ELIGIBLITY UNDER THE GUARANTEE EXHIBIT 25.3 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 _________ STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) __ STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) John R. Towers, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) _____________________ LIFE FINANCIAL CORPORATION (Exact name of obligor as specified in its charter) DELAWARE 33-0743196 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10540 NORTH MAGNOLIA AVENUE, UNIT B RIVERSIDE, CALIFORNIA 92503 (Address of principal executive offices) (Zip Code) __________________ GUARANTEE (Title of indenture securities) GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T- 1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(B) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 3rd day of December, 1997. STATE STREET BANK AND TRUST COMPANY By: /S/ EARL W. DENNISON JR. ------------------------------------- EARL W. DENNISON JR. VICE PRESIDENT 2 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by LIFE FINANCIAL CORPORATION of its GUARANTEE, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /S/ EARL W. DENNISON JR. ------------------------------------- EARL W. DENNISON JR. VICE PRESIDENT DATED: DECEMBER 3, 1997 3 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business September 30, 1997, ------------------ published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin............................. 1,380,475 Interest-bearing balances...................................................... 8,821,855 Securities.......................................................................... 10,461,989 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary............................................ 6,085,138 Loans and lease financing receivables: Loans and leases, net of unearned income ...................................... 5,597,831 Allowance for loan and lease losses ........................................... 79,416 Allocated transfer risk reserve................................................ 0 Loans and leases, net of unearned income and allowances........................ 5,518,415 Assets held in trading accounts..................................................... 917,895 Premises and fixed assets........................................................... 390,028 Other real estate owned............................................................. 779 Investments in unconsolidated subsidiaries.......................................... 34,278 Customers' liability to this bank on acceptances outstanding........................ 83,470 Intangible assets................................................................... 227,659 Other assets........................................................................ 1,969,514 ---------- Total assets........................................................................ 35,891,495 ========== LIABILITIES Deposits: In domestic offices............................................................ 8,095,559 Noninterest-bearing....................................................... 5,962,025 Interest-bearing.......................................................... 2,133,534 In foreign offices and Edge subsidiary......................................... 14,399,173 Noninterest-bearing....................................................... 86,798 Interest-bearing.......................................................... 14,312,375 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary............................................ 7,660,881 Demand notes issued to the U.S. Treasury and Trading Liabilities.................... 1,107,552 Other borrowed money................................................................ 589,733 Subordinated notes and debentures................................................... 0 Bank's liability on acceptances executed and outstanding............................ 85,600 Other liabilities................................................................... 1,830,593 Total liabilities................................................................... 33,769,091 ---------- EQUITY CAPITAL Perpetual preferred stock and related surplus............................................................................. 0 Common stock........................................................................ 29,931 Surplus............................................................................. 437,183 Undivided profits and capital reserves/Net unrealized holding gains (losses)........ 1,660,158 Cumulative foreign currency translation adjustments................................. (4,868) Total equity capital................................................................ 2,122,404 ---------- Total liabilities and equity capital................................................ 35,891,495
4 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 EX-27 15 FINANCIAL DATA SCHEDULE - ARTICLE 9
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN THE FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001028918 LIFE FINANCIAL CORP. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 9,984 10,844 2,900 24,533 0 7,015 7,019 225,547 1,859 294,102 159,840 61,523 13,262 10,000 0 0 65 49,412 294,102 10,001 334 1,817 12,152 5,440 7,101 5,051 900 0 9,150 13,186 13,186 0 0 7,695 1.70 1.70 9.04 3,070 0 130 2,509 1,625 673 7 1,859 1,859 0 1,613
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